AMD: Show Me The Money

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Barron’s had an article the other day touting AMD and saying it might reach $50 a share in two years.

How likely is this?

Well first, AMD is a pretty volatile stock. It tends to jump up and down a lot more than the fundamentals would indicate. Getting to $50 is one thing, staying there is another.

A string of good news, some more profits, and a few extra points of market share could get AMD to $50, but that’s not enough to keep them there.

For AMD to get to $50 and stick there, they’re going to have to make somewhere between $400-600 million a quarter from their CPU division (this is assuming flash memory will be spun off). Right now, AMD is making a bit less than $100 million.

That figure ought to improve the next couple quarters as the Athlon XP is finally laid to rest, but it’s hard to see how AMD could get much above $200 million, even under favorable circumstances, within the next year.

Of course, those who look at stock tend to look beyond the news of the day, and Barron’s is no exception. Its prediction of $50 a share in two years is just about the timeframe in which AMD’s new fab should be producing at full force, and profits could jump up from that (realistically $150-200 million) base.

A $50 stock price for AMD as the “norm” in two years is not at all impossible, indeed, it might be a bit conservative provided everything goes right for AMD.

The problem with the Barron’s analysis is that this is what it’s going to take.

Now how likely is that?

We think it unlikely for the following reasons:

1) All this assume demand for computers will increase at a 10-15% annual increase. This means no severe global slowdown or recession the next two years. That is an iffy proposition, and if the stock market as a whole drops significantly, so will AMD.

2) AMD’s increase in production capacity is necessary, but then they have to sell it. AMD’s expansion plans assume that they can tear off and keep a much bigger chunk of CPU marketshare than they ever have before. There is little sign so far that a terribly significant percentage of people are shifting over to AMD when they have as much advantage as they’re ever going to have in the near future. Going up less than 1% a quarter is hardly a paradigm shift, and it is at least premature to talk about Opterons taking over the world when they don’t currently even have the market share AMD has on the desktop.

3) AMD will not have sufficient production capacity to make big inroads on Intel territory until 2007. By then, Intel will have transitioned over to its new architecture, and there is little sign AMD is going to have a K9 core to compete against it. Even this less-than-rosy scenario assumes AMD will have zero problems implementing all its plans timely, and, well, this I have to see.

4) Lawsuit? No doubt this will encourage stockholders, but this lawsuit is either going to be settled out of court on relatively minor terms fairly quickly, or it’s going to drag on forever. Either way, it’s unlikely to have a big impact over the next couple years.

Conclusion

The problem with the AMD plan (and Barron’s expectations) is that it acts as if Intel weren’t there, or at least playing dead. Talking is one thing, that’s cheap. Building extra fab capacity is not.

It’s like drawing up plays in a football game without considering that the other eleven guys on the field might tackle you.

Can AMD improve its position over the next year? I would be surprised if they didn’t, but I just don’t see a dramatic overall improvement over the next year. Opterons may make some noise, but again, it’s the desktop/notebook field that’s the bread and butter of the CPU industry.

And after a year, the Empire Strikes Back.

The only way I see AMD’s big plans having a chance of success is if Intel blunders again with its next-generation processors the way they did with Prescott.

I wouldn’t bet on that, and again, AMD seems to be resting on its laurels.

Finally, all bets are off if the economy goes south.

To conclude, a $50 share price for AMD is conceivable over the next year, but its likely to be a speculative jump.

Keeping it there after that will likely be a different story.

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Ed

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