Tech: My PGR Presentation

As mentioned in last post, I agreed to do a keynote at a small half-day conference on June 2^nd in NYC for institutional investors, put on by Primary Global Research.  If interested, you can download my presentation in PDF format:  The Investible Microprocessor Landscape: 2009 and Beyond.  My focus was on Intel and AMD.  As time permits, I’ll put up blog entries that explain different parts of my presentation. 

Here are some of the key messages: 

• AMD Unlikely to Recover
• Graphics: Market Transitions in 2010/11
• Next Mobile/Server Boom Starts by Mid-2010
• New CULV-Subsegment Stalls Netbook Growth

 W.r.t. the 1^st bullet, I mean that AMD is unlikely to be profitable in any 12 month period over the next 3 years, and thus its stock price is unlikely to significantly recover as well.

 I do NOT think that AMD will go bankrupt.  Also, I think it likely that AMD, the company, (i.e. excluding Global  Foundries), will be cash flow positive in some of the quarters over the next few years.

 What happens after the next 3 years?  I don’t know.  The tech industry changes too fast to look that far into the future.

 Nevertheless, I do see an investment opportunity in AMD – not in the stock (short or long at its current price), but rather in one of the convertible bonds:  the 2012 convertible bond due August 2012, with a 5.75% coupon.  Current price is ~64.  Assuming AMD stock stays <20 (likely), the YTM is about 22%.  Rationale:

1.  With Abu Dhabi funding the Fabs, AMD’s capital expenditures will be near zero for the next 3 years.  So they should be near cash flow neutral over the next 3 years.
2. In 2H2012, the NY Fab should come online with 22nm.  After Abu Dhabi invested all that money, they are not about to let AMD go under just before the Fab starts producing 22nm microprocessors.
3. It’s in everybody’s interest to keep AMD alive – clearly the OEMs, Microsoft, and Abu Dhabi.  But also Intel – the antitrust stuff will still be going then, and Intel’s case would be subjectively weakened if AMD went bankrupt.
4. Since the antitrust stuff will likely be ongoing in 2012, the investment community will view the case as an AMD asset.  And also with 22nm about to get in production, AMD could likely sell a bond to pay off the maturing convertible in August 2012.
5. In the off chance that AMD did file for bankruptcy, Intel shares would likely soar.  So if you also had a long position in Intel, you would be OK.  On the other hand, if Intel screws up big, and AMD executes well, AMD shares could soar (eg to 40, and since the max exercise price on the convertible is ~20, you would profit from this move).  So your AMD convertible position would provide a partial hedge to your Intel position.  I currently think that the probability of either scenario is very low.

 I’ve been trying to buy the AMD convertible (2012) since Thursday of last week.  Very difficult with Fidelity.  I finally was able to buy some on Tuesday, June 2nd.  If the convertible has a pull back to under 60, I will probably buy more.  It is in my IRA Rollover.

 I feel somewhat stupid about this.  I had all the pieces – just never connected the dots.  As soon as the Global Foundries deal closed, I should have bought the 2012 convertible then, and I would have gotten a much lower price.

My next post on this will provide some detail about why I think that AMD is unlikely to recover in the foreseeable future (i.e. the next 3 years).

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