AMD: Undervalued Buyout Candidate, with Imaginary Impediments

[Ken Luskin]

Here is what I see. I would be interested in your feedback on this:

1) Because rumors that AMD is again a takeover candidate of Samsung: "Rumour: Samsung could move to acquire AMD" Rumour: Samsung could move to acquire AMD

It is worth fully exploring the logic behind such a deal, and the imaginary impediments, that Shorts/Hedge funds and their little helpers (Wall St. ANALysts) have been spreading.

2) The major impediment being spread by Short sellers and their helpers (Short interest is 93 million shares= 15% of Float), is that AMD will lose their license to Intel's X86 architecture, if their is a change in control.

3) Here are some important FACTS concerning AMD and Intel's relationship:

A) Nov. 12, 2009 : "Intel to pay AMD $1.25 billion in antitrust settlement" AMD drops its litigation while Intel agrees to "abide by" a long list of prohibitions. And renewed patent cross-license agreement frees AMD to spin off chip manufacturing Intel to pay AMD $1.25 billion in antitrust settlement - CNET

B) The 5 year patent cross-license agreement protected BOTH AMD and Intel from being sued by each other. All patents created up until Nov. 12, 2014 are covered until their expiration.

C) The patent cross license expired Nov. 2014, and has not been extended.

D) There was a provision, in the now expired agreement, that would make the deal null and void if there was a change of control at AMD.

4) AMD did NOT get access to any technology from Intel. The agreement only protected each other from being sued for patent infringement. In other words, AMD has NOT been relying upon Intel's technology, as many clueless ANALysts and investors believe.

5) Intel was forced to pay AMD $1.25 Billion, because they have an effective monopoly on X86 chips, and broke various Anti-trust laws.

6) If Samsung bought AMD, they could and would continue to sell X86 chips.

7) Intel could decide to to "war" with Samsung, by suing them for infringing various X86 patents.

8) Samsung would retaliate by suing Intel for infringing various patents.

9) Please read these articles about how Samsung is suing Nvidia, in reaction to their patent suit against Samsung:

Samsung seeks broad US ban on Nvidia products Samsung seeks broad US ban on Nvidia products - CNET

Samsung Files Counter-Suit & Patent Infringement Claims Against Nvidia & Velocity Micro AnandTech | Samsung Files Counter-Suit & Patent Infringement Claims Against NVIDIA & Velocity Micro

Intel could NOT stop Samsung from selling X86 chips for at least a few years, if ever.

10) Please read this article: "Samsung Looking to Conquer Semiconductor Business in Next Five Years" http://www.androidheadlines.com/201...emiconductor-business-in-next-five-years.html

From the above article: "Unlike other industries, the semiconductor industry, that being the manufacturing of memory and processors, is a tight race. Intel is the current leader of the pack, yet controls just 14% or so of the overall market. Samsung, in the past year or so, has managed to close the gap by controlling roughly 10% of the market."

In other words, Samsung is already huge in semiconductor manufacturing, but wants to get even bigger.

11) Now for the more interesting part of this article, the relationship between AMD and Samsung; but first a little background. AMD must use Global Foundries to FABRICATE a significant portion of their chips for the next 9 years.

12) Global Foundries is wholly owned by the $800 Billion Sovereign Wealth Fund of the UAE/Abu Dhabi, which also owns 20% of AMD.

13) Please read this article: "GlobalFoundries licenses Samsung process tech, grants AMD access to FinFETs" http://techreport.com/news/26336/gl...ung-process-tech-grants-amd-access-to-finfets

From the above article:

>>>> "Like AMD before it, GlobalFoundries is part of the Common Platform Alliance along with Samsung and IBM. The three firms share R&D costs and implement similar techniques for building chips. Today, the relationship between a couple of those partners shifted fundamentally when GlobalFoundries announced that it has licensed Samsung's process technology."

AMD veep Lisa Su provided an appropriately vague-but-positive statement for the press release announcing the deal:

"This unprecedented collaboration will result in a global capacity footprint for 14nm FinFET technology that provides AMD with enhanced capabilities to bring our innovative IP into silicon on leading-edge technologies," said Lisa Su, senior vice president and general manager of Global Business Units at AMD. "The work that GLOBALFOUNDRIES and Samsung are doing together will help AMD deliver our next generation of groundbreaking products with new levels of processing and graphics capabilities to devices ranging from low-power mobile devices, to next-generation dense servers to high-performance embedded solutions."​

If in fact AMD has some capable new CPU architectures in the works, the availability of a solid 14-nm FinFET process could be the final piece needed to restore the firm to competitiveness with Intel. " <<<<

14) If Global Foundries could not get quick access to the next process technology, which they were able to license from Samsung, they could have become an also ran, and Abu Dhabi's $15 Billion investment in it, and AMD, might go down the drain.

So, my take, was that Samsung did Global Foundries a favor.......... So, what did they get in return?

15) On the surface, Samsung was able to quickly increase the total capacity to produce its latest semiconductor process. The ability to supply extremely large quantities of its latest technology, with a second source, makes it more attractive to the largest chip customers, Qualcomm and Apple.

But, there may have also been a quiet deal struck between Samsung and the Abu Dhabi Sovereign Wealth Fund, concerning AMD.

16) As far as why Samsung would want to own AMD, you must understand Samsung's chip weaknesses, and AMD's strengths.

17) AMD has the world's best Graphics, while Samsung is weak in graphics. Nvidia thought they saw a weakness, and that is why they sued them.

Please read these articles concerning the growing need for more powerful GRAPHICS.

AMD: The Future of Computing: Augmented and Virtual Reality https://docs.google.com/document/d/1uxHgFaCeZaEKxXZKVohbFYlM5SHz8vAVAKuM5D6Ln6w/pub

AMD : "Apple Is Tinkering With Augmented Reality, Too, Analyst Says" https://docs.google.com/document/d/1My3C6nhhR3a_AN-UuwieC_rmu-B7HHCiQf5PZ9NNsE8/pub

AMD: "Magic Leap Demo Flaunts Augmented Reality" https://www.linkedin.com/pulse/amd-...d-reality-kenneth-m-luskin?trk=mp-author-card

18) Even though Intel is the current market leader for high performance processors, AMD has very similar basic IP. AMD's high performance chip IP is extremely valuable, especially for serving the needs of the all important CLOUD providers. Samsung realized how difficult it was to create server chips, and in a very rare instance for them, they quit trying, and recently closed that division. Intel's most profitable division makes chips for servers.

19) This article has a lot of good background info regarding the long term value I see in AMD: AMD: 5 Top Industry Gurus VS Myopic Wall St. ANALysts

https://docs.google.com/document/d/1BLBKpefmLvY4SdOnNoGUzbyRJ4D1zYvwhP2bEIc-_wE/pub

From the above article concerning AMD's valuation in a takeover:

So, what is the TRUE VALUE of AMD?

Its simply the highest price that an entity will pay to BUY the entire company! Semiconductor companies invest heavily in R&D, and also in sales and marketing. Other companies that are in the same general area can eliminate redundancy in a merger/takeover, thereby producing significant profits, when there were next to none before. So, the key metric is Gross Profits (GP), because R&D, sales, general and admin expenses (SG&A) can be greatly reduced in a merger/buyout.

LSI was bought out at an enterprise value (EV) of slightly over 5 times Gross Profits (GP) , International Rectifier is being bought out for close to 6 times GP. AMD is currently trading at an EV/GP ratio of about 1.7 Using an EV/GP ratio of 5 = $11 share in a buyout of AMD.

Clearly, AMDs’ top insiders believe their efforts will produce increased sales and profits over the long term. But, in the mean time, AMD is grossly undervalued, based upon the current level of business.
Freescale Semiconductor Ltd. (FSL) is currently being bought out, for an EV of about 8 times Gross Profits.

20) I have no idea whether AMD's controlling shareholder, the Abu Dhabi Sovereign Wealth Fund, wants to sell AMD to Samsung at this time. But, I do know that AMD is worth many fold its current market price in a takeover.

21) In addition to Samsung, I would not doubt if Qualcomm was extremely interested in buying AMD, for many of the same reasons. Broadcom and a few other companies would probably love to get their hands on AMD's IP, but probably do not have the ability to compete against industry giants Samsung and Qualcomm. Lastly, I think it would be very intelligent for Apple to consider also owning AMD, for some of the same reasons.

22) Being Short AMD at this time, is right up there, as one of the stupidest things I can imagine a professional investor ever doing.

https://www.linkedin.com/pulse/amd-undervalued-buyout-candidate-imaginary-kenneth-m-luskin?trk=object-title

 

[Li Yisuo]

Carrizo is on 28nm planer. It is crystal clear that the FIN vogue was a big dent on the road.

If in fact AMD has some capable new CPU architectures in the works, the availability of a solid 14-nm FinFET process could be the final piece needed to restore the firm to competitiveness with Intel.

Reliability is the key for solid high tech as AMD. So let us talk about FIN reliability. Maybe too early. What we are sure is that Lisa will bring us solid reliability instead of vogue mist.

So, what is the TRUE VALUE of AMD?

EV/GP ratio is a good measure for company with linear growth curve. However here we just have HSA 1.0. We expect exponential growth after 1.0 version for nearly everything. GP up 1 orders is expected. EV/GP up to 7 is expected. So EV can go up ~ 2 orders.

Out of money call with tenor 1 or 2y. The current implied volatility is only ~50%.

 

[Tom Dillinger]

Ken:

I’d like to comment on some of your projections.

First, though, I think I can speak for other SemiWiki readers when I ask that you try to keep your posts more technical, and less prone to financial or marketing hype. Personally, I found your recent post with a bold red font screaming “If you're short AMD, you're stupid!” to be particularly annoying.

That said, I’d like to provide a different view on the value of AMD, especially in light of the (oft-repeated) rumors of a potential acquisition.

I am skeptical of your claim that (5 * Gross Margin) is an effective formula for calculating Enterprise Value, especially for an R&D intensive company.

AMD’s recent financial improvements (from a rather bleak outlook in 2012-3) are based upon revenue and profits from the game console business at 28nm, which is a direct result of services provided to Sony, Microsoft, and Nintendo. Additionally, AMD has announced its intent to continue to pursue design services opportunities.

AMD also has a Wafer Supply Agreement commitment to GLOBALFOUNDRIES through 2024, which would be unattractive to many potential suitors. And, the annual interest expense on its long-term debt is a substantial percentage of its Gross Margin.

To omit R&D (and other) expenses from a calculation of AMD’s valuation is simply incorrect – actually, that applies to any fabless design company.

The other recent acquisitions you mentioned are substantially different than AMD. Both International Rectifier and LSI were profitable in 2014, unlike AMD. Although AMD’s EBITDA was positive, substantial write-downs in inventory and goodwill were required, not to mention the employee separation expenses, AMD’s 2014 net income was negative, as was its annual cash flow.

Lastly, unlike the other two corporate acquisitions you mentioned, AMD’s balance sheet is a mess, frankly:

Current cash and securities: ~$1B ; Annual interest burden: $177M; Long-term debt: ~$2B

2014 Stockholders’ equity:
Paid-in capital: $6.949B
Treasury stock: ($119M)
Accumulated deficit: ($6.646B)
Total stockholders’ equity: $187M

Neither of the other two acquisitions you mentioned had such a weak balance sheet, considering either the debt-to-equity ratio and/or the retained stockholders’ equity.

Your suggestion that the enterprise value of AMD is ~$8B is simply not warranted, IMHO, either by the income-producing potential and/or the company’s balance sheet.

I’ll try to provide a more realistic assessment of AMD’s enterprise value in a subsequent note. For now, I would suggest perhaps “toning down” the rhetoric of your comments.

-chipguy

 

[Ken Luskin]

"Chipguy" This is the area where INVESTORS are allowed to interface with semi professionals. I will post whatever I wish. Stop trying to be a MB Nazi!!!

1) EV takes into account debt and cash. AMD's debt essentially disappears when a company such as Samsung buys them. .... something you clearly do not understand. Samsung, Qualcomm, Apple would pay off AMD's debt with their pocket change. Clearly you do NOT understand that AMD's debt service is part of the reason the shares are cheap.

2) If you did any actual research, you would know that at the time LSI received its takeover offer, they had next to no bottom line profits. The same situation existed for Rectifier. But, asking you to do any real research, is obviously asking too much.

3) How much NET debt does Freescale have? What is the multiple of Gross profits?

4) I suggest you stick to the NERD portion of Semi Wiki, because you are clueless when it comes to understanding Investing.