In a surprising twist of events, a Bloomberg article (that is now nowhere to be found) mentioned that Intel (NASDAQ:INTC) might enter into a licensing Agreement for GPU technology with Advanced Micro Devices (NASDAQ:AMD), after its licensing agreement with Nvidia (NASDAQ:NVDA) expires in 2017. The deal is reported to be worth about $1.5 billion for NVDA.
But even if no one can find the article and none of the two companies have confirmed the article, analysts and market participants are talking about it as if it is real. So the question is, is the Bloomberg article true?
I think Bloomberg did indeed publish it, but for some reason decided to take it down again. The most likely reason is they could not confirm the story from both sides, or that one of the two sides (or both) kindly requested them not to publish it (although it would be strange for Bloomberg to honor such a request).
However, after it was momentarily published, thefly.com picked it up and then the genie was out of the bottle, and the entire market pick it up.
But I think the story is true for another reason. And that is that neither AMD or INTC have denied it. If it was not true or a simply a rumor, both, or at least one company would come out with a press release denying the whole thing.
And the reason they have not denied it is because I think it is true and they can't. Because if they deny it, and several weeks or months later AMD gets an IP deal from INTC, then shareholders from either company would take the matter to court (I'm sure lawyers will find some good reason to earn fees).
So while we don't know if an actual deal will happen or not, if we connect the dots, then a deal between INTC and AMD is probably imminent. Yes this is all speculation on my part, however it is speculation based on an educated guess and not chance.
Does it matter why INTC wants a deal with AMD? No
There is much speculation as to why INTC might want to change GPU IP vendors.
Intel might want to integrate AMD's Polaris design to boost graphics performance on its integrated chips.
Some analysts have said INTC might want to incorporate AMD technology to increase performance in data centers.
Others have speculated INTC might want a bargaining chip against NVDA when its license agreement expires - either to get a better deal or to avoid going to court with NVDA.
It also has been suggested that INTC wants to get cozy with AMD, since the later has such a big share of the VR systems installed. Meaning, INTC wants to be on AMD's good side as a way to be in the VR space in the future.
Whatever the reason, the end result is the same. And that is, AMD will be the clear-cut winner and NVDA will lose some ground that will probably pull back its stock some for some time.
Winners and losers
Let's say that AMD signs some kind of a deal with INTC. Even if we assume INTC is changing from NVDA to AMD to save money, I assume the deal will not be worth less than $1 billion for AMD.
If confirmed, that might wipe out about 50% of AMD's debt over the life of the deal. Put it another way, if the deal is spread out over five years, that means about $200 million in IP revenue for AMD per year. Or about $50 million per quarter, or about $0.06 EPS, per quarter. If the deal is anything higher than $1 billion, EPS will also be higher.
Let's also not forget AMD already has $785 million in cash and equivalents. I do not know at what yield AMD bonds are trading at the moment, but I can tell you that the moment any type of a deal is announced, those yields will fall like a rock. Because between the cash on hand and the money AMD will get from INTC, AMD might end up with zero net debt.
Which also means financing costs will fall. In fact with a deal in place, I'm sure AMD will be able to use part of its cash on hand to repurchase existing debt so as to lower its financing costs. As a reminder AMD's financing costs were $177 million last year.
While most analysts say NVDA does not rely on the IP revenue stream from INTC, I'm not so sure. NVDA had net income of $929 million for FY16.
If NVDA makes $66 million per quarter as reported, then that adds up to $264 million per year. In other words, almost 30% of NVDA's net income.
That's a big chunk of NVDA's net income folks. I doubt very much if NVDA will be able to make up for it in 1-2 years. I mean it might, however even so, it will mean that at best, EPS will go into reverse for some time.
Anyway I look at this deal AMD will come out a clear-cut winner, and NVDA will be a loser.
While it will not be a big setback for NVDA'a revenue or growth prospects, it will be a setback in terms of EPS.
As for AMD, with a deal in place, not only does it mean the company might end up with zero net debt, but also that financing costs will drop like a rock immediately. I'm modeling financing costs will fall by half within two quarters. That will make AMD a profitable company very soon.
And if the Zen line of chips are even partially successful, I stand my ground on my target price of at least $10 a share for AMD shares within 12 -18 months from now.
Disclosure: I am/we are long 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.