AMD still fab despite analyst downgrade

Big Blue, Motorola unlikely to be bedmates

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Financial analyst Ashok Kumar, of USB Piper Jaffray, downgraded AMD shares from buy status to neutral yesterday, while the firm's share price sank a few dollars more on Wall Street.

But the decline in the firm's stock price has forced the firm to clarify its position on its fab capacity and the partnerships it has with IBM and Motorola.

AMD's share price closed at $61.25 yesterday, down from $65 the day before. Kumar changed his assessment of the company, citing alleged delays with the Duron processor, moderate PC growth and oversupply in the flash market.

One investor (and a Register reader) wrote to AMD financial guruette Toni Beckham, saying: "Since you are unable to keep up with customer demand for the Athlon processor, have you considered using a second source, such as IBM or Motorola? Both companies are familiar with the copper process, especially Motorola, as you share the same technology."

AMD and IBM have an existing agreement in which it is possible for the former to use the latter's fab capacity.

Beckham replied: "We appreciate your interest in AMD. First, the issue is not one of capacity. AMD has a new fab in Dresden, Germany that is ramping as quickly as possible. Second, if we were to hire a foundry to manufacture processors for us, profits would diminish as we would have to pay the foundry to make the wafers.

"Last, it would take a foundry longer to ramp than it is currently taking AMD. Although both companies are familiar with the copper process, neither is familiar with AMD's specific manufacturing process. And they may not have the tools required. And they may not even have available capacity. Hiring a foundry is not as simple as 'just doing it'.

"Having said all of that, I am not at liberty to share information with you regarding AMD's future plans or current discussions with current or potential partners."

Still, she said enough to dispel such rumours, didn't she?

Meanwhile, Kumar's analysis seems to us (remember, we tipped AMD when it was trundling along at $16 this time last year) to be fundamentally flawed.

First, AMD PC customers we have talked to tell us that there's no problem whatever with the Duron. One said: "If AMD are that bothered about Duron sales why do they not promote it or allow any marketing funds to be allocated by OEMs for promoting it?

"If they were constrained on stock why would they pull forward a price drop by one week then by a further two weeks?

"The Socket A design is done, Slot A is already marked EOL for the next few weeks. Any OEM close to AMD (that's everybody except Dell) knows that and have designed accordingly.

"Sledgehammer does not compete with the Pentium IV but with Intel IA-64 products in the server space."

And there is still a very severe constraint on Flash memory. We reported earlier this year from CeBIT about the situation, which cannot be turned round swiftly. You can't build a new fab in a week. Much of that shortage is fuelled by the continuing expansion of the mobile phone market, with most analysts forecasting big ramp figures over the next two to three years.

Meanwhile, hardware site AMD Zone is reporting that the company may well build a new fab in Austin. Some weeks ago we reported that AMD was exploring the possibility of expanding its existing, Dresden fab.

Just in case you want to know, we don't invest in companies we write about, whether it be Chipzilla, Chimpzilla or Ramboost... ®


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