In my previous article, I looked at an alternative to being long ARM Holdings (ARMH) while avoiding the volatility and difficulties of a semiconductor stock yet still being long the strong market of embedded systems. Also, a cash rich balance sheet and a full 5% in dividend yield made the company of choice even more interesting.
Today I'm leaving ARM-designs altogether and move over to the traditional x86-world. Here the war rages on between the David, AMD (AMD) and the Goliath, INTEL (INTC). A war everyone thought Intel would have won many years ago by sheer force, but a war in which AMD is still somehow managing to survive.
We are not going to do a deep dive into AMD's balance sheet but rather look at some of the more soft dynamics of the market. I'm sure some of you are bound to disagree with some of my comments, most probably the fourth one.
Here are four reasons why AMD will not go bust:
Always have an alternative when negotiating
When a customers comes to Intel looking to buy a few million computer chips, they are not going to be playing by Intel's rules. At all cost will they want to have an alternative to sourcing from Intel.
Keep the machines running
Any industry where competition is stiff and where capital requirements are rising to new record highs are bound by the same rules: Keep utilization rates high in order to offset the high investment costs. Intel is now opening up its fabs acting like a foundry for outside companies, as long as they are not competing. Intel is currently a generation ahead of the pack, but can we expect that to last long when foundries are investing more than ever and where consolidation is bound to happen and where you can't have your assets idling? AMD as a fabless semiconductor company may be hurting at the moment, but it's only temporary (like pain, right?)
We live our lives in a very media rich landscape. High-definition, real-time graphics are everywhere. New gaming consoles are just around the corner and are bound to raise the bar even higher. Rumor has it that Microsoft's (MSFT) XBOX720 and Sony's (SNE) Playstation 4 (names not officially confirmed) all have AMD-processors taking care of the graphics and we already know the recently released Wii U is based on an AMD GPU and IBM (IBM) CPU. In addition, 4K-graphics will move into high-end television sets in 2013. In today's market it's more important than ever to have computer chips which handle graphics well. Intel has a long history in this department with subpar capabilities and drivers that are not working. In layman's terms: they suck. AMD is the clear leader, especially when it comes to APUs, where the CPU and the GPU are on the same piece of silicon. APUs are increasingly used in ultrabooks, which is the only growing segment in the traditional desktop+laptop-market.
Perhaps the heading is misleading. Not so much Rory Read, but someone who is willing to do much needed radical changes. Dirk Meyer was let go, presumably for not positioning the company early enough in the mobile computing market. Right or wrong, there has simply been too many disappointments in recent years. Remember the disappointing Bulldozer performance, while at the same time you had the marketing department raising the expectation to an unreasonably high level? Or the supply chain problems, with not enough chips to sell when there finally was a huge opportunity with the Brazos platform/ Bobcat core to beat Intel in the laptop segment? Or the exceptionally weak market share in the potentially lucrative server market? Someone had to go. Granted it is still too early to judge Mr. Read, but he is doing radical changes which probably should have been made a long time ago. I'm sure Mr. Demerjian at SemiAccurate is not in agreement with this last bullet point, but I would actually recommend the reader to visit SemiAccurate and read some of his articles - you will find more reasons there why AMD will continue to hang in there for many more years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.