AMD: The good old days of fabs & servers

AMD's 1Q11 sales were in line with estimates and sees 2Q a bit better, but while longtime rival Intel shone in its 1Q11 breakout, AMD still is weighed down by chip price declines and share losses. Credit Suisse's John Pitzer compares AMD's latest results (1Q11) vs. five years ago (1Q06) judging that sales haven't increased much ($1.6B vs. $1.3B), and margins are noticeably lower (GM 44.6% vs. 58.5%, OM 5.7% vs. 19.4%) as is EPS ($0.08 vs. $0.37).

But the biggest concern is AMD's share of the server market has evaporated, from 22% down to 7% (and its PC share is down a few notches to 18%), points out Pitzer. "The lesson: Owning server market share is more important than not owning a fab," he writes.

True, fabless AMD no longer has the hassles associated with funding next-gen process technologies and new fab capacity, nor the same debt/interest/legal issues, points out FBR Research's Craig Berger. But he agrees that AMD has a big problem in server share, he's skeptical about AMD's proclaimed ability to ramp 32nm this summer, and questions whether partner GlobalFoundries will be properly motivated to push hard on 22nm:

[S]ome investors may get excited that AMD's 32nm Llano Fusion processors are now shipping, that AMD is profitable even though it only has 6% market share in server chips, that 2H11 seasonality should improve, and that possible market share gains could drive meaningful leverage in the model[.]

[W]e, on the other hand, continue to see AMD serving a niche market not occupied by Intel, with Intel's massive process leadership and R&D investment scale continuing to hamper AMD's ability to get any real traction over time. [...] AMD appears to us as having a lack of strategy and leadership, given that 32nm production yield visibility remains low, and given that Intel's much-improved Sandy Bridge HD Graphics 3000 could potentially address more of the consumer notebook market for discrete GPUs, thus possibly hitting discrete GPU attach rates.

The board's unexpected CEO dismissal leaves AMD without a clear leader or strategy at a very important time for AMD as it ramps integrated APU Fusion processors. [...] [W]e await the hiring of a big-name outsider, and hope that AMD does not become the umpteenth chip firm to target the tablet market with a "me too" ARM-based processor that drains AMD of the vital resources it needs to compete against Intel.

Berger also takes a stab at the impact of tablets on PC usage, calculating that 2.5 tablets sold cannibalize one PC. Assuming 2011 projections from Apple (35M-40M tablets) and new entrants (20M-30M), as many as 70M tablets could ship in 2011, and thus ~25M PCs cannibalized. Given a 375M PC unit base, that could shave a precious -6% or -8% off PC unit growth rates, he says.