AMD is from Mars, Investors are from Venus.
Posted on December 15, 2007
Analysts stumbled over themselves to make punishing comments on AMD post their analyst meeting.
We don’t normally take an interest in companies like AMD but you could cut through the analyst and investor frustration with a knife. Of course management didn’t paint a very encouraging picture. Imagine addressing the analyst community with the line "[we admit to a] lack of profits in all businesses, appallingly negative cash flow, poor distribution management and large market share declines." Yipes!
Part of the problem is as hard as they tried management demonstrated that they have a hard time understanding the investment community. The fact that the Chairman of the Board, Hector Ruiz, exclaimed that he doesn’t understand how the valuation of the company could be worth 40% less than it was just a short time ago. Well Hector, when you have a pile of debt and you are losing money in all your businesses it can compress your equity valuation pretty fast!
Setting aside the angst for a moment there is probably more potential in the name for 2008 than many might think. Historically AMD was only an also-ran to Intel which is how they are often looked at today. However AMD has changed some things in the last 12 months that make the situation different.
For a little while they were ahead of Intel which helped shift their image a bit (and also took a chink out of the Intel brand.) While Intel is now back in the drivers seat AMD will lose share in servers and the core PC market. But AMD will maintain a steady if lower share nonetheless.
AMD may have overpaid for the ATI acquisition but it has given them a much better foothold and set of growth opportunities then they have ever had. While the Intel/AMD analysts panned AMD there were a few who cover Nvidia and the graphics space who noted that due to a fresh product cycle and a number of design wins AMD/ATI is poised to gain share in the graphics space during 2008 at the expense of Nvidia.
Beyond the two core markets there are some sideshow attractions in mobile and flat-panel TV that may also help a little bit. If they can diversify their handset business to other manufacturers it could be more than a little.
The key is still getting operations back in order and making the new plan work. Production has to ramp, promises have to be kept and numbers have to come in at or better than guidance which is for break-even in Q2.
AMD will be CapEx constrained in 2008 and looking to turn some portion of their $600M in excess assets into cash which should provide some additional cushion for operations.
The last thing that is a little bothersome is the absurdly aggressive long-term targets the CFO put out there. The near-term 2008 plans are reasonable and call for excellent execution. Then the long-term plan jumps up to 18% to 24% operating margins! What?! We’d say that 15% would be an admirable and almost miraculous result from here. How can management put these numbers out in this environment?
It only provides evidence that AMD management just doesn’t quite know how to talk with analysts, investors and the market. Taking it all in suggests that there probably is more value in the business than the current valuation accounts for. We don’t agree with the management plea that "the glass is half full" but if they can execute on the basics in the next few quarters there is more upside than if they were just the #2 CPU company in the market.
– Kris Tuttle
[Research 2.0 purchased a small position in AMD post their analyst meeting.]
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