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Analyst lowers AMD estimates on late Barcelona launch, expects cuts
By Ann Steffora Mutschler, Senior Editor -- Electronic News, 9/28/2007
Semiconductor analyst Doug Freedman of American Technology Research is lowering his estimates on Advanced Micro Devices for Q3 and fiscal years 2007 and 2008 based on the company’s late Barcelona introduction and disappointing early performance, but maintained its “Buy” rating as cost saving cuts could be on the way.
“We believe the company’s late Barcelona introduction and disappointing early performance are an early indication of a bad marriage of process technology and design that will be hard to fix before a move to 45-nm is required,” Freedman said in a report today.
He also said that while he expects a near-term snap-back in ATI results off of a well-below historical quarterly revenue run rate, he is mindful of both Nvidia’s and Intel’s flawless execution and aggressive roadmap.
Further, Freedman explained the lower estimates reflect less aggressive assumptions for AMD’s Barcelona/Phenom launch, and that the marriage of 65-nm process technology and Barcelona architecture is not working as evidenced by early performance disappointments and delivery push-outs.
“AMD’s back is against the wall as the Q4 goal of profitability appears increasingly unlikely,” he said, and noted that he expects the company to deliver on at least a few of the potential cost savings initiatives.
Freedman points to Intel’s execution and roadmap as putting even more pressure on AMD to deliver 45-nm on time in summer 2008, with the 45-nm road-map to be an integral component to AMD’s asset lite strategy, even though AMD has not spelled out exactly what that strategy will entail or what the timing will be.
“We maintain our ‘Buy’ rating as we believe the company is carefully considering, and is close to, implementing cost savings initiatives that will refocus R&D and SG&A dollars on core PC-related business,” he said.
At the same time, the firm lowered its target price for AMD stock to $17, noting that valuation is compelling relative to historical trends. “With liquidity not a concern for the foreseeable future, we believe shares will have the potential for out performance as we move farther away from Barcelona and close to a new architecture designed for 45-nm with the next 9 months of development critical towards this goal,” he explained.
In May, the firm upgraded AMD’s stock based on the company having a window to gain back share, which it did, and that aggressive restructuring was necessary and likely to happen.
Now that liquidity concerns have been quieted with convertible financing, Freedman said, “we believe the focus has rightly shifted directly to AMD’s roadmap and execution, which have been dwarfed by the nearly flawless execution from Intel and Nvidia in CPU/GPU. As a result, we believe management’s back is against the wall to cut costs and have a successful, on time delivery of 45-nm designs by mid-summer 2008.”
To do this, Freedman believes AMD needs to consider making aggressive cost cutting a focal point of any discussion on profitability.
“In the recent past, AMD has been very adamant that it won’t cut its way to profitability. However, without a product launch to drive profitability until at least mid-2008, we don’t believe the company has any other choice. We believe the possible sale of the GPU segment of ATI or the consumer division, neither of which are core to AMD’s legacy business, remains on the table with AMD retaining the chipset business of ATI in order to seamlessly build integrated CPU/GPU chipsets for Fusion-like products. We also continue to expect the company to announce a sale of its 200-mm equipment from Fab 30,” he said.
At the same, Freedman said AMD still has a lot of work to do to fix the architectural mismatch of Barcelona with the 65-nm process node and the poor performance of R600. “Empirical evidence suggests that it has historically been easier to walk away from a busted design and start over from scratch than to pour R&D into attempting to improve a bad design. Therefore, we expect a shift in attention to AMD’s 45-nm pilot results and demonstrations as early as December at the company’s analyst event, where we believe it will be more important to deliver early 45-nm samples than a 2.5GHz Barcelona processor. There is no doubt that new process and product designs increase the risk of success, but in this case it appears to be the only option and best way to regain competitive products.
“However, we believe there is value in AMD given the many options management still has on its plate to cut costs and execute on 45-nm designs,” Freedman concluded.
