Consumer Electronics
Can AMD Make It Long-Term on Fabless Model? (AMD, INTC, TSM, NVDA)
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Advanced Micro Devices, Inc. (NYSE: AMD) has now finalized its pact with GlobalFoundries which gets rid of its 9% stake in the foundry. The value of about $278 million will ultimately result in charges of about $700 million and it means that AMD payments of $425 million will be paid over four installments this year. Purchase commitments with GlobalFoundries came with low yields and brought lower margins. To make matters worse, Intel Corporation (NASDAQ: INTC) has apparently been taking more business as AMD did not ship enough new processors.
AMD will at least be able to take some portions of its process making to another foundry, but the details on which functions that is remain unknown as of yet. The pricing model goes back to a cost-plus model that is based upon a fixed number of wafers per quarter. AMD is expected to spend much more on its wafers in 2012 versus 2011.
Will AMD use Taiwan Semiconductor Manufacturing Company (NYSE: TSM) for its ‘secondary functions’ in the new deal? It already makes most of the AMD graphics chipsets. The graphics market is potentially up for grabs as rival NVIDIA Corporation (NASDAQ: NVDA) looks to move beyond graphic chipsets to have some processor business in tablets and mobile computing devices that are in the post-PC movement.
The big question is whether or not AMD’s gamble was the right move to save on costs or not. Intel is fab-heavy and can retool its plants almost immediately when it decides to make changes. For AMD to switch directions, it has to order the change to be made to its partners and go through the waiting process while obligations have to be fulfilled for whatever existing product is being shipped. Fab-lite means ‘change slow’ even if it means lower operating costs.
In a world where many investors believe that Intel’s processors for PCs have been somewhat held back just so that AMD cannot lose too much business to where they can again assert that Intel is monopoly, you have to wonder.
At $7.47, AMD’s 52-week trading range is $4.31 to $9.17. If you trust estimates, Thomson Reuters has estimates of $0.65 EPS for 2012 and $0.81 EPS for 2013. We will see if those estimates hold up after the charges get factored in.
JON C. OGG
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