Advanced Micro Devices (NYSE:AMD) has been getting the short end of the stick as tablets began to cannibalize the PC market. Indeed, the segment of the PC market most vulnerable to replacement by tablets is the low end, where the bulk of AMD's PC market-share is. Unfortunately, not only is a reduction PC TAM a problem for AMD's sales, but given that Intel (NASDAQ:INTC) is not immune to these effects, it is now leveraging its scale and manufacturing advantages to be more aggressive at the low end. This is a very clear negative for AMD's PC business.
Illustrating The Problem
At Intel's investor meeting, it presented the following slide illustrating its plans to more aggressively target the low end of the PC/convertible market with its "Bay Trail" architecture:
Now, I know what you're thinking; hasn't Intel played in the $199 - $349 price band historically? Why are things changing for both Intel and AMD as a result of Intel's intention to fight more aggressively in the low end?
Two words: Bay Trail
Intel's low end Pentium/Celeron parts have traditionally been based on the same chips as the higher end "Core" processors - just disabled. Since Intel's yields are generally extremely good, it is very likely that Intel has been taking good chips and disabling certain features in order to get them to market at the right price points.
Now, these disabled Core chips are generally two chip/two die solutions that look something like this:
There's at least 150mm^2 worth of silicon here, as well as a fairly complex package. While Intel can still turn a nice profit on these chips, AMD beat Intel to the punch earlier this year with a single chip solution with its "Kabini" processor (image from Anandtech):
This gave AMD a cost benefit at the low end (although it does have to pay TSMC (NYSE:TSM) to build its chips, which hurts its gross margin structure). Unfortunately, Intel has responded with its own single-chip Bay Trail processor. The die size of Bay Trail-M is roughly equivalent to AMD's Kabini, and the competitive comparison between the two parts is generally the following:
- Kabini has a faster graphics processor
- Bay Trail-M has a faster CPU
- Bay Trail-M consumes less power
Unfortunately for AMD, Intel has a number of key advantages outside of cost:
- The Intel brand is more powerful than AMD's
- Intel's cost structure is better, so it can profitably compete on price (and Intel's new management seems OK with getting down and dirty on price)
- Intel's relationships with many, if not all, of the major OEMs are much better than AMD's
So, What's The Bottom Line?
AMD will probably see its PC business decline at a rate faster than that of the overall PC market during 2014. While this itself isn't a reason to get to panicky (share loss to Intel has been well known for a while now), it does mean that AMD's best shot of delivering meaningful returns for its shareholders is to continue to aggressively diversify its business away from the PC market (as it currently is doing). The semi-custom market seems to be a pretty good one for AMD, and with enough customers lined up, it could still be a long-term profitable growth story.
However, this isn't "easy" and AMD is by no means a "slam dunk". The business faces a number of key structural headwinds, and its large dependence on a segment of the PC market that Intel plans to more aggressively take share in should be a cause for serious concern. Intel has technological advantages, cost advantages, and brand power/relationship advantages. If AMD can succeed on Intel's turf in the face of those headwinds, then more power to them, but the odds of that are exceptionally low.
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.