Stampeding Sheep

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I’ve spoken a number of times, including fairly recently about future prospects for AMD and Intel.

However, the stock market has been following the beat of a different drum. Intel stock has gone up as its prospects have worsened (even taking into account today’s plunge); AMD’s has gone down as their prospects have brightened. That’s not how it’s supposed to work.

Why?

The Case for AMD

  1. AMD is moving away from low- to no-profit K6-2 sales to higher profit Duron/Athlon sales. The average amount of money they’ll receive from a CPU is bound to go up.
  2. AMD will be making a lot more Durons/TBirds next quarter, right into the Christmas season, which historically is the biggest sales quarter for computers.
  3. Looking towards 2001, the chips they’ll be making will be faster than any generally available Intel chips, since Intel apparently isn’t going to make a lot of Willamettes until .13 micron migration.

  4. The DDR chipsets that will start coming out in the next few months will give more of a performance boost than the initial PIII chipsets.

The Case Against Intel

  1. They’ve been having problems supplying all kinds of chips all year.
  2. Intel essentially has nothing new to offer for the next nine months. The only new development they can talk about is Willamette, which will be vaporware for the mainstream for quite a long time.
  3. Intel hasn’t been doing too well meeting earnings estimates from its core businesses anyway the past year, and have been meeting them with smokes and mirrors with a nudge and wink from the analysts. They ran out of stock to sell at a big profit this quarter, hence the earnings warning.

My Earnings Are Better Than Your Earnings

We are faced with an extraordinary stock price situation. A reasonable, conservative estimate of AMD’s earnings over the next year is about $3.00 a share.

A reasonable estimate for Intel’s earnings per share over the next year is probably about $2.00 a share.

In a sane world, you’d think a share of AMD stock would be worth more than a share of Intel stock. Or, maybe because they’re the new kid on the block, maybe just about the same.

Nope. A share of Intel costs more than twice as much than a share of AMD.

Why?

If Tammy Lee Bakker Is In A Beauty Contest, and Her Relatives Are Judging, It Doesn’t Matter If You’re Jenny McCarthy

I’ve been following AMD and Intel stock closely for about the last year. I have been appalled by the lack of quality found in the stock analysis.

Essentially, you have sheep. Intel is a blue-chip stock. People have heard of Intel. Intel has the reputation of being the leader. People think that if things get bad for Intel, they must be as bad or worse for everyone else. They feel safe buying Intel. They don’t know AMD. They can’t imagine a world in which AMD can actually do better than Intel. So people recommend Intel a lot and don’t recommend AMD all that much.

It also helps to cover your butt following the analyst leader, and unfortunately for the world, that analyst is Ashok Kumar. He’s the lead technology consultant for US Bancorp Piper Jaffery.

Mr. Kumar has one major and one minor problem.

His major problem is that he cannot conceive of the possibility of AMD doing anything good. Ever.

His minor problem is that he is slow to realize when Intel does something bad.

Combined, these two problems lead to some interesting opinions.

Here’s just a few of his gems from the last couple days:

“I’m sure there’s a big sign flashing in front of AMD saying ‘Road Kill,’ “ Kumar said. “When you get this magnitude of an inventory overhang, AMD basically gets destroyed.”

Intel issued a profit warning based on lackluster European sales. There’s a few possible reasons for this. Intel has had problems supplying European distributors. The Euro (and other European currencies) have dropped against the dollar in recent months, which
makes products priced in US dollars more expensive in Europe.

However, the evidence seems to suggest that European computer makers have responded to lack of Intel supply by turning to AMD. If processors have become more expensive in local European currencies, seems probable people would be more likely to take a look at lower-priced AMD processors, don’t you think?

Matter of fact, you don’t even have to think. Take a look here. I look at these guys a lot, and they do a pretty good job in their forecasts. Sure doesn’t look like a bad quarter for overall or even European computer sales to me. If Intel didn’t do so hot, who else could have picked up the slack?

Funny Mr. Kumar couldn’t find that.

Actually, an inventory overhang is coming next year. However, this time around, AMD is going to have the faster processors which they’ll probably sell at or lower than the price Intel will want to sell processors for. Who’s more likely to get “destroyed”?

Just this morning, the gentleman came up with these wondrous statements.

Says INTC not Losing Market Share to AMD

They have. Only a couple percentage points, and AMD won’t be making a lot more processors until the fourth quarter as they rev up Dresden and transition from K6-2 manufacture to Duron/Athlon. Figure an increase of less than 10% this quarter, but more like 30% next quarter.

AMD only ships 3 – 4 Million Units per Quarter

It’s more like six million, and has been for a while.

INTC ships 35 Million

Actually, probably less than 30 million; they may hit 35 million fourth quarter, but probably will just get close.

INTC has Excess supply enough to provide 120% of the Demand this currently does and will continue to hurt AMD

That should come as a surprise to even Intel. If they have all this excess capacity, why are so many processors (including Celerons) in short supply?

Worldwide Slowdown for demand in 3Q

I hate to tell Mr. Kumok something, but while an increase of 18.5% is not the greatest increase in history, it’s still pretty good, even for the computer industry.

Especially in Asia where growth fell from 60% to 30% in Computer Sales

First, it’s more like 35%.

Second, if you got a 60% increase in pay in year one, and just 35% in year two, would you stop spending money? Actually, the percentages work out to about the same increase in money.

Third, the base year was when Asia was in deep recession. Of course the first year is a big jump percentage wise; that’s because the sales in the base year were so low.

He Gets An F, And He’s Considered the Star!!

Not too good, is it? But this is the guy people listen to. Never mind he’s mostly wrong; the people listening to him don’t know that yet, and until they do, reality has little bearing on the stock price.

Oh, did I mention Mr. Kumok is an ex-Intel employee?

I’m not saying AMD should be worth $200 or even $100 a share. There are some clouds on the horizon for CPU manufacturers, and I’ll get to that next. However, it’s really hard even given that how you couldn’t value a share of AMD stock at least the same as a share of Intel stock. Even that would represent valuing a share of AMD a lot less than a share of Intel, since AMD will probably make at least 40% more earnings per share than Intel.** Either AMD is worth a lot more, or Intel is worth a lot less. You could make a good argument as to which one it should be; what you can’t make a good argument for is a share of Intel being worth twice as much as one of AMD.

What’s Going To Happen In the Near Future

Looks like both Intel and AMD are taking a 20-25% plunge from yesterday’s prices today. That probably gets Intel roughly where it should be pricewise, just makes AMD more undervalued, but that doesn’t matter when people listen to the Pied Piper.

The fourth quarter should be a pretty good quarter for both Intel and AMD. Unless the world starts sliding into recession really soon, we’ll probably have a huge quarter for Christmas, and both companies will do very well.

It’s after Christmas that doesn’t look so good. At that point, AMD will be able to make about 10 million CPUs a quarter. By that point, Intel probably could make 35 million. Demand for CPUs the first few quarters of 2001 will probably be more like 35 million. That’s ten million less than the two can make. Something will have to give, and right now,
AMD looks like it’s in better shape than Intel in any price war; it’ll have the higher Mhz.

**Overall, Intel makes a lot more money than AMD, but it also has far more shares outstanding than AMD. There are 6.7 billion shares of Intel out there, as opposed to only 300 million shares of AMD. Intel would have to make over 22 times more money to have the same earnings per share as AMD, and they only make roughly 15 times more.

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