AMD Could Double, Helped By Its Server Strategy
By TIERNAN RAY | MORE ARTICLES BY AUTHOR
Use of low-power chips and foray into the "microserver" market could pay off for the No. 2 chip maker.
Advanced Micro Devices (ticker: AMD), the No. 2 PC-microprocessor maker, has a fairly impressive headquarters building in Sunnyvale, Calif., near the offices of its much larger rival Intel (INTC) in neighboring Santa Clara. Both have stood the test of time as a slew of start-ups have moved in and out of the anonymous office parks dotting the Valley. Every once in a while, when the old titans need new blood, they troll the newbies in those rented cubicles. In February 2012, for example, AMD bought SeaMicro, a 2007 start-up just down the block, if you will.
The deal was important. SeaMicro offers AMD a chance to take share in the mainstream server-computer market, in which Intel sells about 96% of the chips, according to IDC. If the effort succeeds, it could lift AMD's stock substantially. At a recent price of $3.94, the shares are up 64% this year, but still down 32% in the past 12 months, as last spring's fleeting hopes of a sustained turnaround faded.
This time could be different. SeaMicro's technology looks good; its management team, astute; and the market opportunities, promising. One newly converted bull, Dan Niles, who bought AMD this year after being negative on its prospects last year, thinks the shares could go to over $8. Niles, who works at AlphaOne Capital Partners, sees this happening if AMD's revenue grows to $7 billion by 2015, and if its stock multiple of enterprise value to trailing 12-month sales rises from 0.7 times now to 1.3 times, which would bring it closer to Intel's 2.2. He considers this very possible.
The 30-year circus of AMD versus Intel is at a particularly interesting juncture. The SeaMicro deal places AMD's server-microprocessor business under the purview of the start-up's founder, Andrew Feldman, a Stanford University brat and an economist by training, who built SeaMicro by allying with Intel and teaching the semiconductor giant how to better use its own chips.
This comes at a time when the plain old personal-computer market is terrible, a concern for both companies, albeit more so for Intel, which sells the vast majority of PC microprocessors.
Markets that neither chip maker dominates, such as those for tablets and "microservers," a new class of server computers, offer lots of opportunity for both companies. The tablet market could expand by more than 50% this year, while microservers are a brand-new market.
Along with Feldman, much of the AMD management team is relatively new, including CEO Rory Read and Lisa Su, head of its global business units, each of whom came aboard in the past two years.
At AMD's offices last week, Feldman wildly scribbled diagrams about the server market on a whiteboard, and made it clear that he relishes the irony of battling his former partner.
Feldman built SeaMicro by convincing Intel of the promise of microservers. Intel wanted to sell traditional Xeon chips—among its most expensive—to SeaMicro to use in microservers. But Feldman insisted on much cheaper Atom chips that Intel sells for tablets and smartphones. These are vastly weaker than Xeon processors, but can be grouped to accomplish specific tasks, such as serving up Web pages or databases. "What I was able to show Intel is that we would sell four times as many Atom chips as Xeon chips, and that Intel would make 1.7 times the revenue as they would have with Xeon," says Feldman.
THE WAY FELDMAN DID THAT was to design a "fabric" chip that combines all the Atom chips with the memory and network bandwidth they need to operate in concert. He had concluded that power consumption is the biggest variable cost facing companies such as Google (GOOG) that are building the world's biggest data centers. A fabric chip lets the Atom do needed tasks while using much less power.
The microserver promises to boost ARM Holdings (ARMH), which sells designs to all of Intel's competitors, including AMD, to make small, power-efficient chips for mobile phones and tablets.
A new technology from ARM, called the Cortex A57, is that company's first attempt to help partners such as Qualcomm (QCOM), Nvidia (NVDA), and AMD storm the server market, where the ARM camp has had no presence. Feldman's microprocessor team will sell ARM-based chips, as well as the x86 chips that are compatible with Intel processors. "All you have to ask is, Will ARM win? And will AMD win with ARM?" says Feldman.
The ARM camp can, indeed, win in servers, he contends, given that history shows that smaller, higher volume, lower cost technologies of the kind ARM develops usually win the day against big, overdesigned parts like Xeon.
Even some analysts who appreciate Intel's strengths agree that chips running on ARM technology will capture share in the server market. FBR Capital Markets' Christopher Rolland, who recently raised his rating on Intel to the equivalent of a Buy, writes that ARM-based parts will steal 10% of Intel's business by 2018.
Of course, AMD isn't unique in offering the guts of a server on a chip. FBR's Rolland observes that Intel recently purchased Valley start-up Fulcrum Microsystems, and has bought various product lines from Cray (CRAY), the supercomputer giant, and QLogic (QLGC), the storage-networking vendor.
This week, AMD will announce details of its server-chip strategy. Feldman thinks its chips, which will ship in 2014, will be very competitive with Intel's next server processor, code-named Avoton, which will use the same technology that the Atom does for phones and tablets. Yes, Intel has learned the lesson Feldman taught it. "Whether Avoton will close the gap with AMD is hard to say right now," comments Linley Gwennap, whose Linley Group evaluates microprocessors. "Intel really hasn't given sufficient details to make that conclusion."
High sales of server chips could help AMD, starting in 2014. The company's revenue fell 17% last year, to $5.4 billion, following gains in 2010 and 2011. That was in part the breakdown of the PC market, still a concern for AMD, but also in part the onslaught of Intel in server chips, where the Xeon line, although expensive, did rack up gains.
Overall, AMD's prospects look better than they have in quite some time. It has already won the business to power both the new PlayStation 4 game console from Sony (SNE), as well as the rival next-generation Xbox from Microsoft (MSFT). But the server business could be an even bigger prize.
