After announcing a disappointing Q3 and guiding for a dismal Q4, shares of Advanced Micro Devices (AMD) have continued to plummet without a positive catalyst. However, on October 29th, the company will be announcing an update to its corporate strategy.
While investors are not generally moved by the obligatory power point slides, large promises, and buzzwords when it comes to such a beaten down turnaround play, the upcoming announcement could very well spark a significant short-covering rally. Why?
Well, there are two likely scenarios that I see for this strategy announcement, which is said to include an as-of-yet unidentified "special guest":
- The special guest is a representative from either Microsoft (MSFT) or Sony (SNE) disclosing details of a next-generation console win. This would help bolster credence of its "semi-custom" approach.
- The guest could also be a representative from ARM Holdings (ARMH) and there could be a joint announcement involving AMD's new micro-server strategy. Alternatively, AMD could be announcing its intent to go for the smartphone space by leveraging ARM's IP to get its foot in the door fairly quickly.
In either case, the announcement will likely help curb some of the pessimism surrounding the company and its current direction. AMD, according to its most recent call, eventually wants to significantly de-lever itself from the traditional PC space and instead focus on the micro-server, ultrathin PC, and semi-custom design markets.
Over 20% of the company's shares are sold short, so even the slightest whiff of good news could ignite some short covering. Interestingly, in the 10/26 trading session 6461 November $2.50 calls were traded, indicating that many expect this announcement to spark a significant rally.
What Could Go Wrong?
Of course, there is also a chance that the special presentation fails to impress. AMD has promised much in the past and has very consistently failed to deliver. Partnering with ARM may give it access to lower power micro-architectures that it could not afford to develop internally (as its larger competitor Intel (INTC) has with its latest Atom chips), but there is more to the equation to success here:
- Crowded Space - the low power ARM (and soon Atom) space will be filled with a number of strong, well-capitalized players. AMD is the underdog here, and its execution track record over the last several years is not in its favor here.
- ARM Server Success Not Guaranteed - While there is a lot of buzz about ARM designs in servers, there is no guarantee that the ARM instruction set will make any significant headway in the server space. POWER by IBM (IBM) and SPARC by Oracle (ORCL) are strong designs backed by very excellent companies that failed to stave off Intel, so expecting ARM and its partners (potentially including much stronger partners than AMD) to really take non-trivial share in the server market is certainly on the optimistic side (especially with Intel's newfound aggression in the micro-server space with its Xeon and Atom processors).
AMD has a lot of strong technology. Unfortunately, it is held back by mistakes made by the previous management team. However, if it can slim down, find a few lucrative focus areas that play to its strengths (graphics!), and then execute effectively, then it will be successful going forward. But trying to compete against both Intel and Nvidia head on in each of their core businesses is very clearly a losing strategy. Hopefully, tomorrow's strategy announcement will give AMD investors something to finally be excited about.