Kerrisdale Capital Investment Case Study Spring 2015 Competition – ‘Find a Zero: Which Billion Dollar Company Will be Bankrupt by 2020’ – case study on Advanced Micro Devices, Inc. (AMD)
Also see case studies on SolarCity here, Sears Holdings here and Peabody Energy here.
Abstract:
We contend that AMD one of Silicon Valley’s semiconductor success stories, will file for bankruptcy by 2020. Since 2008, this legacy company has survived by slashing operating expenses, spinning off its manufacturing business and transitioning away from its core PC business to “growth markets”. While it may be succeeding in marketing its turnaround narrative to the market, we see ADM at a point of no return. We identify a toxic combination comprising an uncompetitive product portfolio, technological leap forwards by competitors, several structural challenges, poor positioning due to an ineffective strategy and a worsening balance sheet. While it is bagging some wins, the clock is ticking and AMD will be unable to drive profitability in industries where product leadership, rather than merely pricing, determines success.
Participants: Bardavid, Toby; Pedretti, Ivan; Presa Perez, Aessandro
Advanced Micro Devices, Inc. (AMD) Overview
AMD is a global semiconductor company based in Sunnyvale, California, USA that designs, develops and sells microprocessors for computing, communications and graphic visuals for business and consumer markets. It employed 10,149 staff as of September 2014. The company is quoted on the NASDAQ and traded at around $2.4bn as of February 20th, 2015.
In view of the awful performance in the past three years, AMD is transitioning away from PC to “growth markets”, aggressively marketing its reorganization narrative to justify a disproportionate valuation. We argue that AMD is a typical example of a legacy company, which still benefits from its past reputation as a technological leader to fuel misconceptions about its survival prospects. Although it plays a systemically crucial role to avoid the complete monopoly of Intel and the likes in certain markets, it is not a sufficient argument to out rule the option of bankruptcy. Surprisingly, many investors are buying into the turnaround story advanced by its recently appointed CEO, Lisa Su, and we do not dispute that AMD still retains some healthy business units. However, we think that AMD, which once reached a valuation of $6.8bn in 2010, is destined to go bankrupt by 2020.
Structural Challenges Pushing AMD Towards Bankruptcy
A. Industry Dynamycs: Where Winner Takes It All
In the semiconductor industry, small feature improvements can yield exponential competitive advantages including lower cost, material usage reductions, lower power consumption and greater performance. The semiconductor industry is characterized by extremely short product life cycles (i.e. upgrade frequency of 12-18 months) thus radical supplier substitutions and market share gains are common when chipmakers are unable to meet the future requirements of customers1.
Furthermore, this industry is highly cyclical, meaning that semiconductor companies are at the mercy of the end consumer’s needs. For example, following Microsoft’s discontinuation of support for Windows XP in 2014, many companies have updated their computers.
This ongoing corporate refresh cycle has boosted many companies’ revenues but not really AMD’s, as the company is over-indexed to the volatile consumer PC segment3. During industry downturns, semiconductor companies focus on R&D and creating innovative products. This means that the companies with the deepest pockets are able to make technological leaps, leaving competitors years behind. Therefore in some markets players can earn quasi-monopoly status, as is the case for Intel in in desktop PCs and servers.
B. Key Industry Trends
Historically, consumers that needed more power tended to buy desktop PCs as opposed to laptops. However, with technology advancements, market demand is pivoting away from desktops, even for professionals and intense gamers. AMD has recognized this trend and is refocusing on processors for laptops, but Intel already has a similar range on the market, which is more performant and more power-efficient.
See full PDF below.
