American Technology Research has an interesting note out this morning calling for changes in the CPU space where Advanced Micro Devices (NYSE: AMD) and Intel Corp. (NASDAQ: INTC) compete.
The call is mainly a reiteration for Intel’s rating but the note goes as far as pointing out that there is a secondary (or tertiary) role involving Broadcom (NASDAQ: BRCM).
Doug Freedman, Managing Director of Research at AmTech, made severalobservations and believes several issues are developing in this space.First noted is the belief that AMD’s executive level changes are asignal that restructuring actions will become more visible toinvestors. The list of actions he mentioned include the following:
- new faces in many high profile roles,
- the sale of non-core businesses including the ATI CE businesses (both handset and Digital TV product lines), and
- manufacturing base divestiture in an effort to share process technology development costs with a wider product/market base.
What is interesting is that this notes that Broadcom (NASDAQ: BRCM) isa likely candidate to acquire AMD’s consumer TV business. Freedmanalso views the handset-based product line as available for sale, but isunable to identify a potential buyer given the limited customer base.He notes that Broadcom could reasonably pay $250M to $375M (1 to 1.5times sales) that might likely have a stock and cash component. Thisalso refers to the use of outside manufacturing and the existing tiesthat have existed in the past.
Freedman noted that the future of ATI’s embedded application processorbusiness is more questionable (as most interested companies alreadyhave in-house capability in this highly crowded segment) as itscustomer base is limited and has been losing share.
On low-cost processors, Freedman says that the firm has seen peeranalyst communication data on current pricing of Intel’s Atom CPU’s andother CPU products for the low-tier notebook and desktop market and thefirm’s own channel checks indicate CPU pricing is below what issometimes communicated (INTC’s Atom is priced below Intel’s Celeron andAMD’s Sempron). He notes that Atom processors continue strong ramps inthe second half of 2008 and believes that Atom CPUs with chipsets areselling for $35 to $40 and are on track to ship 10 million units fromnotebook strength.
Freedman also believes Celeron 3xx CPU family is selling as low as $34for the low-tier desktop and $43 for the low tier notebook systems, andbelieves that AMD’s Sempron CPU family is selling for about $30. Bothprice points require an added chipset with ASPs ranging from $13 to $25with a solution cost $15-$20 above Atom class products. All of thiscould encourage the next leg up in entry-level PC student market andclassrooms could migrate to a model of one laptop per child, connectedwith WiFi over a shared computer lab school model.
Freedman concludes that Intel Atom CPUs and other low-tier offeringsare priced to enable high-demand elasticity while maintaining theguided gross margin (57% for FY08); and believes that Intel willpenetrate the low-tier CPU as the price points are open for targetedproducts and as Intel’s ability to control the platform andfunctionality likely allows it to control the cannibalization that ispresently worrying investors.
On Intel, AmTech has maintained its Buy rating and $27.50 price target.
Jon C. Ogg
July 30, 2008
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