Advanced Micro Devices Inc (AMD)

[pgerassi]

Dear Bobs10:

The whole x86 Server market is about 4 million CPUs per quarter, mostly DP Xeons and SP P4s. Intel derives about $2 billion from these, so 10% or 400K CPUs is $200 million each quarter. With 90nm, AMD can make 8 million Opterons per quarter. That is sufficient to allow the server market to double in size and still be able to supply all of it.

Assume that Opteron was selling 100% of this market and it may drop its total unit marketshare to 22-30%, but at far higher ASPs and revenue market share. 4 million Opterons would sell for $2 billion or $500 each and if the other 6-8 million sell at $100 (conservative), then AMD has a CPU revenue of $2.6-2.8 billion or about 36-39% revenue share (overall ASP of $220-240). Given the current 75%/25% fixed/variable cost ratio, AMD would have gross profits of $1.5 billion and $1 billion after tax each quarter or about $2.20 EPS. And that is with no flash included.

As for dual core, if poriced appropriately, say $3K for the top bin, losing 1.5 million of production for 500K is a ASP and revenue gainer to add $1 billion in revenue and move ASPs to $360. That would fall directly to the bottom line and add $1.50 to EPS. AMD would be making $1.7 billion in cash each quarter. We should be so lucky.

Face it! AMD does have the capacity to supply 100% of the server market and reap 80% of all CPU profits. Intel couldn't handle a $3+ billion haircut on revenues, they would lose money (until they stripped away some money losing divisions and shave head count (especially those with large stock options)).

But so much for "pie in the sky" scenarios, the truth is that AMD can supply all of the high end of the CPU market even at 130nm. They can do more at 90nm. 20-30% of revenue share is doable at 90nm just using Fab 30. With Fab 36, 80-90% of revenue share becomes feasible and with 256KB 64 bit K8 Semperons, could even supply 100% of the CPU unit market.

As to a price war, Intel would need to drop its ASPs to under $75 to drag AMD into the red. At that point, Intel is bleeding to the tune of $3 billion a quarter of cash (remember to add in the costs of the stock buy back program needed else the share price would fall to below book of $5 a share). I don't think the shareholders would stand for that.

Pete