Advanced Micro Devices: Will Somebody Please Stage an Intervention?

Just a few short months ago it seemed that Advanced Micro Devices (AMD) was going to steal Intel’s (INTC) lunch money. Now that Intel has beaten up AMD with a price club and is eating its lunch, things are really getting ugly:

Advanced Micro Devices, embroiled in a brutal price war with Intel, will need to raise money within the next six months, according to Doug Freedman, an analyst with American Technology Research.

From taking market share to running out of cash in less than one year… amazing.

Perhaps not surprisingly, the industry mavens at Semiconductor Fabtech (whose customers really don’t want to believe semi capex will be cut) are more sanguine. Excerpts from Semiconductor Fabtech Is a CapEx crunch at AMD brewing? :

I also noted Mike Splinter of Applied Materials, during a conference call yesterday, clearly state that he expects both AMD and Intel to meet current CapEx plans this year. This point shouldn’t be overlooked as Applied has spent a lot of time with both of these customers, checking on purchase requirements for this year.The vibes picked up over AMD’s spending plans indicate at the moment that orders for Fab 36 and Fab 38 are being placed, but also that AMD is getting very tough on prices and contract deals - even delayed payments!

That last point is a bit scary and adds to the cash problem rumours, but CapEx overall doesn’t seem to be affected….

If CapEx is cut, we would expect this to happen later in the year rather than now, and if AMD does go back to the market to raise more funds, then CapEx could be saved anyway.

Even before the price battle with Intel started and AMD forked out for ATI, it was going to be tough for AMD to fund this high level of CapEx this year. There seems little doubt that it’s tougher now but few real signs that CapEx will be cut.

Will somebody please stage an intervention?

Disclosure: Author has no position in the above-mentioned securities.

Comments

[Tech:]

Why don't you say also that AMD's Chief mentioned that Vista's impact was underestimated.
you do not say that if you don't see some benefits out of it, do you?
and also yesterday press release on new 65nm offering better solutions for 2 different markets.
power concious 45W Athlon64 (Fanless machines)
and performance with Athlon64X2 6000+ (with this one , you can get a similar performance of an Intel Quad core at Half the price!)
Power, price, performance. and more to come, AMD is not going to be short of customers soon ! to the contrary.

2007 Feb 21 11:27 AM

[William Trent_:]

AMD is not short of customers now. They are long capacity. They will continue to innovate and produce more chips, as will Intel and all the other chipmakers. The problem is, the new chips will simply crowd out old chips - leaving more of them and resulting in further price cuts. Until new equipment orders slow down to a pace below that of end-sales for semiconductors this will not change even if AMD invents the most marvelous semiconductor of all time. It is a simple function of supply being greater than demand.

As to Vista, if its impact is underestimated, why is the rate of sales growth slowing down for both Ingram Micro (the biggest PC distributor) and Hewlett Packard (the biggest PC manufacturer?) If anything, it seems that Vista was overestimated.

2007 Feb 21 12:25 PM

[Tech:]

those biggests, may need to burn their inventory of older machines to then promote more vista power ready products ?
I understand your continuous theory on oversupply but it may need a closer look.
they are not producing more of the old chips like with Flash or DRAMS (or Pick-up cars!), but rather bring new solutions to the market
Why should AMD stop producing more of their new and latest products?
Why producing on 65nm on larger wafers and then allowing cost reduction should be stopped?
if not to keep or continue to enlarge their market share with the new products.
yes Intel does the same (and it helped them regrab some MS) and both may earn less, but with today's market share Intel has a lot more to loose than AMD, (more fixed costs, less sales) and the analysts do not seem to treat equally.

2007 Feb 21 01:59 PM

[William Trent_:]

It is more likely Intel and AMD that will be burning the inventory of older chips. They usually have price protection and obsolescence agreements built in to their supply contracts. And whether the solution being created is new or old there are a finite number of PCs for them to go into. You can put an old one in or a new one in, but they are essentially interchangeable. It is how many chips that can be made, not how new they are, that is the issue.

AMD and Intel should continue to innovate and produce chips, but they should do so only at the rate that customers demand them. Both companies are producing more chips to "gain share." They can't both gain share, but if they keep trying they can both lose profit, as they have been doing. And as to having more to lose, Intel can also afford to lose more - it can cut its profit until AMD is actually losing money and forced to throw in the towel - that is the game of chicken that is being played right now, and it is stupid and destructive for both companies.

2007 Feb 21 02:28 PM

[Tech:]

agree on the fact that they gain less but many companies would like to be as profitable as they are!
(Last AMD numbers were one shot ATI acquisition costs)
but by the law they can NOT agree together on fixing higher prices for processors can they?
and some companies or industries are surviving with very low net margins but with high volume (HP, ...)
Intel for sure has a lot of cash in the bank but because of their size, their fixed cost (an the cost to invest on 45nm production plants) is a lot higher than AMD . It is why I say that Intel has a lot more to loose trying to keep their MS and I am not sure their shareholders agree on Intel cuting their profits like last quarter by a huge 1.5Billion! continuing at this rate would bring them in the red in a year!

2007 Feb 22 01:19 PM

[William Trent_:]

Not only can they not agree to fix prices, they cannot agree to limit their capacity, which would have the same effect. However, no law prevents them from separately limiting their capacity to the level that is appropriate given demand.

2007 Feb 22 01:59 PM