Advanced Micro Devices Overview

February 28, 2005 - Copyright by Morris Rosenthal - - contact info

Trading Notes

DELL
HPQ (Hewlett Packard)
INTC (Intel)
AMD (Advanced Micro Devices)
MU (Micron)
NVDA (Nvidia)
ATYT (ATI Technologies)
WDC (Western Digital)
IOM (Iomega)

Notes on trading AMD stock for investing in my SEP

Advanced Micro Devices is generally thought of as Intel's only competition, which is basically true, at least in the realm of PC processors. From the strategic point of view, since AMD is essentially Intel's only opposition on the desktop, Intel investors can hedge their bets with AMD options, which may be part of the reason for the high level of institutional interest in AMD shares, currently around 80% of the float. AMD often trades at around 5% of Intel's market cap, despite the fact that AMD has as much as 20% of Intel's market share. The main reason for this is that Intel operates at much higher gross margins than AMD, thanks to their volume advantage (greater than 4:1).

About a third of AMD's revenues come from flash memory products, especially those destined for the cell phone market. Lately, institutional busy-bodies have been suggesting that AMD divest itself of this "commodity" product, but they forget that the best year AMD ever had was largely driven by memory product sales. It also goes against the grain to ask what is essentially a two product company to drop the one that's temporarily on the outs and become a one product company. AMD just had their best revenue year ever, topping $5 billion dollars, but only earned $0.25/share, giving it a P/E multiple of around 70 at the current share price. AMD is a fun stock for traders since it seems to go up and down by 100% in a slow year and 300% in a dinger. AMD is currently trading at around 1/3 of its peak value, at a price it previously reached in the early 1980's!

One thing that jumps out from AMD's annual report is that of that $5 billion in sales, they invested $934 million into R&D. BY contrast, their sales budget was less than their R&D budget, and they lump sales and marketing right in with administrative overhead at $807 million. Contrast that with the pharmas who whine about their R&D expenses and then spend far more on marketing.

I've owned AMD off and on for as long as I've been investing in stocks. I once had my entire IRA in AMD stock, watched it fall from the mid-20's, down to $9, then recover to $25 where I sold out. That's how I beat the collapse of the NASDAQ, but it could just as easily been a wipe-out:-)

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