Intel’s solid second quarter numbers and statements on the conference call following earnings made it clear that OEMs and ODMs are gearing up, building new machines and buying more parts for them. So it would stand to reason Intel’s biggest rival AMD will also benefit from the build up.
But AMD (NYSE: AMD) has been a leaky boat for the last few years and tossed around like the fishing vessels of “Deadliest Catch.” For CEO Dirk Meyer, now in his third quarter at the helm of the chip company, his main priority has been getting it to a break-even point.
He has his work cut out for him. No one is expecting AMD to snap back to profitability immediately. According to a survey by FactSet Research, analysts expect the company to report a loss of 49 cents a share on revenue of $1.13 billion this quarter. AMD’s break-even point has been set at $1.3 billion. Still, Intel beat expectations handily, and AMD could as well. “Could” being the operative word.
At least one analyst firm is optimistic about AMD’s chances. FBR Capital Markets upgraded the company to “Outperform” one day before the earnings were to be issued, setting $5.25 as a target price and raising its earnings expectations. AMD closed the day at $4.17.
“We do think the company will report strong 2Q results and 3Q guidance on Tuesday after the market close, so this is a somewhat shorter-term call in nature. Our new distributor checks suggest Asian distributors had a stronger-than-expected June quarter and are more positive about 3Q shipment prospects. In addition, recent checks for AMD and the PC supply chain have strengthened,” wrote analyst Craig Berger in a research report.
He cited a seven percent increase in PC builds on Q2 and an expected 13 percent improvement in third quarter PC builds. Even better, AMD’s production starts shot up 78 percent sequentially in the second quarter. Third quarter production is now expected to gain one percent, but it’s better than the 13 percent decline FBR was projecting just a month ago.
FBR forecasts AMD will generate about $160 million of free cash flow in the second half of 2010, a dramatic improvement from the significant losses expected just three months ago.
By the numbers
The mix of products is different between AMD and Intel, which could weigh on the bottom line. Intel (NASDAQ: INTC) has a much better mobile platform portfolio than AMD, and laptop sales are driving the business these days. AMD is more heavily invested in desktops and desktop sales are in the tank right now.
Also, Intel has the hotshot Atom processor that’s finding its way into netbooks and other handheld devices, to which AMD has no direct response. AMD has repeatedly said it does not wish to pursue the netbook market with a whittled down x86 processor like Atom.
Instead, it wants to go to market with a line of consumer ultra-low voltage (CULV) processors that would fit into extremely thin and light notebooks with smaller power envelopes, requiring less cooling systems and offering a longer life span. This market has sparked a lot of interest, so much so Intel is targeting it as well.
Hot graphics biz
AMD does have the suddenly-hot ATI graphics business. With the latest product release, ATI has surpassed its arch-rival nVidia and is earning raves from gamers and enthusiast sites. So while Intel sells cheap, low-margin Atom chips, AMD is selling expensive GPUs that go on video cards that cost as much, if not more than some netbooks.
Also on the plus side, AMD has spun off its fabrication facilities, although it still carries Globalfoundries on its books for now. Eventually that business will be stand-alone and generating business from other chip vendors than AMD.
With AMD’s product mix heavily tilted toward the consumer side of the market, AMD stands to benefit from the October 22 release of Windows 7 that’s expected to do far better initially with consumers than businesses.
While viewed in a far more positive light than Vista, Windows 7 is still not in high demand by businesses, and any large scale deployments or migration are not expected until next year, after enterprise cusotmers have had time to examine and test it for compatibility issues.