Advanced Micro Devices (NASDAQ:AMD) is a name that has been a rather hot battleground stock for the last six to 12 months. While shares have more than doubled from their November 2012 lows, both the business and the stock face significant headwinds. AMD's server business is falling apart (and it's not clear if the new micro-server strategy will play out as expected), it has lost (and appears to continue to lose) PC market share, has no meaningful presence in tablets, and the game console wins that were so highly touted by the press and the investor community turned out to be incredibly low margin (as the bears rightly called). This is a business that has some serious issues to deal with, so when I see the PR machine making some unbelievable claims, I feel the need to reconcile them with the reality of the situation.
AMD Is a Starfish, Intel Is a Whale?
AMD's Roy Taylor made the following claim in a recent VR-Zone interview:
'If the water becomes shallow, and you're a whale, you're gonna get grounded and you'll die,' he said. 'If the market goes down by 50 percent, it's awfully dangerous if you're a whale.'
This analogy is, of course, referring to Intel (NASDAQ:INTC) as the "whale" while AMD is the "starfish." While this is an adorable analogy, it is also patently ludicrous. I will show you why with just one chart:
While Intel's revenues are up 30% over the last five years, and have been more or less flat from 2011-13 (during the decline of the PC), AMD's revenue base is down significantly over both the five-year period as well as from the beginning of 2012.
The problem here is that when the market begins to shrink, the "whale" gobbles up the food that it was allowing the starfish to eat. If you listen to the quarterly calls from Intel beginning with Q3 2012, you will notice that Intel has been opportunistically taking share at the low end (from AMD) by cutting prices of its lower-end parts. While this hasn't exactly done wonders for Intel's shareholders, it has been devastating for AMD's shareholders. Keep in mind that AMD's share price still sits at just under half of the 2012 peak, while Intel's share price is, yet again, is down a smidgen.
Furthermore, the market isn't really "disappearing" so much as it's undergoing a form factor shift. This means that, going forward, chips need to be targeted at lower power levels and have a significant amount of the design and validation effort targeted toward power-saving features, rather than brute performance. Now, who is in a better position to adapt to this new trend? The company that hasn't turned a GAAP profit in years, whose products in this dying space have been largely uncompetitive? Or the company that still mints at least $2B/quarter in pure profit, even after excess capacity charges and a dramatic increase in R&D spend so as to be competitive in the new world going forward (Intel)? The problem with this analogy is that it assumes the whale is not particularly well-suited to adapt to a changing market.
AMD Tablet Hype -- Where Are the Goods?
What I find particularly interesting is that while the "whale" prepares to release its upcoming Baytrail SoC at IDF next month, which will fit nicely into everything from 7" fanless tablets to low-cost, larger notebook/convertibles, AMD's Temash product has been completely absent from tablet designs currently shipping in the market. It seems more and more likely that AMD will ship its 2 core, 1GHz Temash product for tablets in a world of quad-core Silvermont, Cortex A15, and Qualcomm (NASDAQ:QCOM) Krait 400 parts. Furthermore, every single fanless design with Temash that AMD has shown off has been a bulky 11.6" one.
So, I'd like to know just how AMD believes that it is in a better position going forward than Intel is in this new world.
I understand completely that AMD PR has a job to do. This is what these folks are paid to do, and we should not begrudge them for trying to work with what they have. With much of AMD's engineering talent poached by the likes of Samsung (OTC:SSNLF), Apple (NASDAQ:AAPL), and Qualcomm -- and with AMD's R&D budget down significantly -- it is not hard to understand why marketing hype is absolutely necessary. However, as investors, we need to be able to cut through the noise and get to the goods. And right now, AMD is much more exposed to the PC market than even Intel is. That makes it much less a "starfish" and much more simply a small, crippled whale that is starving to death, as the larger whale can no longer afford to give the smaller whale its leftovers.
Disclosure: I am long INTC, AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.