When you think of one CEO that went from hope to hype to outright disappointment in technology, the top name that comes to mind after 2006 and then after 2007 is Hector Ruiz of Advanced Micro Devices (NYSE:AMD). If Ruiz manages to hang on for many more quarters it may just be in the role of non-executive Chairman rather than CEO & Chairman of the company.
But AMD did the unthinkable a couple years back and that decision is made at the top. It picked a pricing war with near-monopoly Intel Corp. (NASDAQ: INTC) and as it turns out it really seems that the limitations of Moore’s Law seems to apply to AMD much more than Intel. This could have had a shot at being a David vs. Goliath, but this David turned out to be really near-sighted and incapable of using a sling. Now AMD can’t even really just back away from higher-end chips to focus on the lower-end because it gets to fight Intel there too. Intel seems to have its legal advantages intact too.
NVIDIA (NASDAQ: NVDA) also seems to have an upper hand over AMD’s ATI unit, although we know if ATI loyalists that would argue this and each generation of new graphic chips from one to another seems to leapfrog the competing graphic chip. As far as the computing power that we use ourselves in computing and gaming it is more of a six-five pick-em. But AMD has been criticized over and over for its ATI acquisition.
We criticized its first financing round as being voodoo financing, although the second round didn’t seem as bad. We have not heard of any Hail Mary passes that are expected during an upcoming analyst meeting, although we can’t hang our hats on that with any certainty.
We also have pointed out how we found some notes from this Monday that are turning out to be reality about serious problems with the new Barcelona chips and its chips were falling far short of the GHz goals originally set out and short of you know who’s processors. We also would take the "show-me attitude" in believing that just because AMD indicates that a quarter delay is really just a one quarter delay. It is quite possible that analysts will have to trim down estimates yet again. As it stands now AMD is not expected to be profitable this year nor in 2008 and investors have seemed to shift to preferring to buy quality rather than hope.
Ruiz also has an image issue that can’t really be repaired overnight. Some analysts have noted how he has been very difficult to pin down historically. One analyst has said directly that it seems a little different than before because he cannot ignore a 75% stock drop as an anomaly and he is almost forced to deal a bit more openly. But having many of your underlings having very little respect for you and having an almost open lack of respect shown when he’s not around can’t be good. All those employee stock options aren’t really worth any money when your stock hits 52-week lows every single day.
Our contacts tell us of in-fighting between design groups and that many managers don’t exactly think all that fondly of Mr. Ruiz. We will be the first to admit that this is the same as the legal term hearsay and that if it was a trial it would not be admissible. But we’ve seen that most of he hearsay from some of our sources on this topic is usually true on the bad things behind the scenes and turns out to be gossip or rumor when it is positive.
This last financing investment announced out of the Middle East did actually create a rift from some shareholders who have been holding AMD stock. The last reported $622 million investment from a unit of Mubadala Development Co. in Abu Dhabi represents roughly an 8.1% stake and some institutions have considered it an insult since they didn’t get to participate.
But there is actually at least some good news for shareholders:
- AMD doesn’t need cash now;
- AMD may have a large grant coming down the pipe and it may be able to monetize some of its existing fabs;
- Analysts are already mostly negative, so downgrades may just be "estimate cuts.’
- The ATI unit could be converted to cash and the company could clean its books entirely, although it is a written down asset;
- AMD has an implied permanent safety net in that it is deemed to be a "must survive company" because it keeps Intel (NASDAQ: INTC) from being a total outright monopoly;
- The worst of the stock drop is likely behind it if you believe they have a perpetual place; It is quite possible that an IBM (NYSE: IBM), Taiwan Semi (NYSE: TSM) or another giant tech company could come in and partner with AMD. We cannot neglect that possibility, although they may want to install their own leader to save it.
- An activist investor like Carl Icahn could always decide that enough is enough and want to stir up the pot, although we think he’d rather focus on profitable companies that can be made more profitable.
Lastly we want to caution one key issue:
- There are very few readily available names that could step into this role and immediately make a difference. With no heir apparent Ruiz might be able to shun any serious efforts against him for quite a long time. In light of reports that Dell isn’t focusing on AMD chips to the point that had been hoped, you can probably forget about a Kevin Rollins being asked to step in. When we have discussed an heir apparent or even a candidate with others there has yet to be a single solid candidate that everyone likes or would say is the perfect replacement. picking one senior manager may result in others defecting. Once again, just because things don’t go well under a leader doesn’t mean he or she can be readily axed without a long hard fight.
At roughly $9.00, shares are only 2% or 3% above 52-week lows. The 52-week high is $23.00, but the two-year high is above $40.00.
Jon C. Ogg
December 6, 2007
Jon Ogg can be reached at firstname.lastname@example.org; he does not own securities in the companies he covers.