By Ken Luskin [email protected] October 28, 2014 PART I: People & Strategy

The Brilliance of Steve Jobs was in building a team of geniuses Virtually everyone in the world knows that Steve Jobs was the driving force behind the success of Apple. Unfortunately, few of them understand that without the team of technical gurus Jobs assembled, his visions would not have become reality.

Without a Microprocessor Brain, the iPhone would not exist Inside every “smart” computing device is a microprocessor, considered the brains of the device. When Jobs was creating what is now known as the iPhone, he needed a special microprocessor, which could make it through the day without draining the battery. Jobs first approached Intel, the company that was supplying the microprocessors for the entire MAC line. Intel was not interested in supplying a relatively low cost mobile chip, because the bean counters and FAB guys had no vision. So, Jobs built a team of top mobile microproprocessor engineers, licensed the ARM architecture, and created a chip that became the brains of the iPhone and iPad.

Apple buys P.A. Semiconductor in 2008 to keep Apple’s microprocessors on the cutting edge With this acquisition Apple received a group of highly innovative engineers, including ex AMD employee Jim Keller. From a VentureBeat article: “Keller spearheaded the development of Apple’s custom mobile processors — including the A4 in the iPhone 4, the A5 in the iPhone 4S and iPad 2, and the A5X in the new iPad — all of which have managed to keep Apple’s mobile devices on the cutting edge. His departure could be a big loss for Apple, which desperately needs smart chip designers to keep pace with the rapid evolution of mobile processors”

Five Tech Gurus that have joined AMD

#1: October 19, 2011: Former Apple exec Papermaster joins AMD

From Macworld: Advanced Micro Devices has appointed former Apple iPhone development chief Mark Papermaster as chief technology officer, where he will take charge of developing AMD’s future microprocessors and hardware. Papermaster joined Apple in 2009 as senior vice president of devices hardware engineering, leading development of the iPhone and iPod hardware. Apple hired Papermaster from IBM in 2008, but made his appointment official after settling a lawsuit filed by IBM around Papermaster’s alleged violation of a noncompete agreement.

#2: August 1, 2012: Apple CPU lead Jim Keller heads back to AMD as chief architect From VentureBeat: “For AMD, Keller’s return is nothing but good news, especially after its recent disappointing quarter. He previously played a key role in the design of AMD’s Athlon 64 and Opteron 64 processors, which were among the last generation of processors where AMD was able to outclass Intel. Keller also co­authored the HyperTransportspecification and x86­64 processor instruction set. .In short, he’s kind of a big deal. By taking a leadership role at AMD, Keller could potentially help the chip maker be more competitive against Intel and give AMD a leg­up when it finally decides to enter the mobile processor arena.”

#3: April 19, 2013: Anandtech: “The King is Back: Raja Koduri Leaves Apple, Returns to AMD” by Anand Lal Shrimpi “ I remember back when AMD’s CTO of the Graphics Product Group, Raja Koduri, first quietly left the company for Apple. At the time (2009) I didn’t understand why Apple would want so many smart graphics guys on staff, were they working on their own GPU? Mac OS X was hardly a gaming platform of choice back then so the idea didn’t make much sense to me.

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 1 By Ken Luskin [email protected] October 28, 2014 It turns out that Steve Jobs wanted to surround himself with the absolute best in the business. Today, the impact of the work of folks like Bob Drebin, Raja Koduri, Jim Keller and others is quite evident. Apple tends to ship some of the fastest GPU hardware in the mobile industry, and its work in bringing high­DPI displays to virtually all of its products is unparalleled. It turns out, that’s what happens when you hire a bunch of crazy smart GPU folks. Raja’s immediate goal is to ensure that AMD has the best GPU architecture/hardware possible. Unfortunately, it will likely take 2 ­ 3 years to realize this goal ­ putting the serious fruits of Raja’s labor somewhere around 2015 ­ 2016. Interestingly enough, that’s roughly the same time horizon for the fruits of Jim Keller’s CPU work at AMD. Today, AMD is a much smaller and more agile company. Raja believes AMD is in a better position to take advantage of new opportunities vs. being in the hopeless position of never being able to catch up in mature markets. . What drives Raja is the belief that delivering good quality, high performance and low power graphics will continue to matter going forward. I agree. Raja views AMD’s challenges as being difficult, but not insurmountable. AMD needs a great graphics architecture and it needs a great SoC. Raja’s scope will include making sure that, at least on the graphics hardware/software/dev­rel side, AMD is in the best possible shape. Jim Keller will do the same for AMD’s CPUs.”

Surely extremely profitable mega companies such as Apple and Cisco can afford to pay higher salaries to microproprocessor gurus, than can AMD. So why have these 3 well recognized chip industry gurus joined or rejoined a currently struggling AMD? The answer is that stock options/grants potentially provide multi­million dollar returns, significantly greater than the salary component of pay packages for top executives at the largest tech/biotech companies. This same logic applies to solidly profitable Nvidia, the only high end graphics competitor to AMD.

#4 October 2013: Jean­Christophe Baratault Nvidia's head of professional graphics, the man behind the success of the Quadro & Tesla line of graphics accelerators joined AMD.

The same logic applies to any of the top companies in the server space.

#5 Advanced Micro Devices Recruits Dell Veteran Forrest Norrod

“Forrest Norrod, 49 years old, was most recently vice president in charge of Dell’s server systems business. Prior to that role, he led an organization that developed custom­tailored servers for companies in the hyperscale market, AMD said. Hyperscale refers to Web services like Google Inc. and Facebook Inc. that serve a profusion of Web pages and consequently buy large numbers of computer servers” “Under Norrod, the server unit grew into a US$10 billion business. He was also responsible for building Dell's successful Data Center Services division”

Massive % gains for early investors who clue­in before public wakes up

Wall St is a notorious myopic place, that many times only looks a quarter down the road, while technology engineers and executives have a multi­year view. Unlike BioTech companies, that must go through years of

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 2 By Ken Luskin [email protected] October 28, 2014 FDA trials, which provides public insight into what they have created, technology companies, such as Apple and AMD, are able to maintain the secrecy of their inventions until launch.

Still there can be public info that Wall St. simply refuses to focus on until it smacks them in the face. Back in early 2004, Wall St. viewed Apple as a company that was destined to be stuck with a 10% market share of PCs, with little chance of significant growth. While the stock had been flat lining since late 2000, the sales of iPods and iTunes music had been growing at dramatic rates. But, it was not until Apple broke out the sales and earnings of these growth areas in their Q2 SEC filing, did Wall St finally wake up. While Wall st was asleep during the period from 2000 to 2004, Apple had been hard at work at a strategy that would diversify their sales into devices that did not directly compete with the monopoly held by the Microsoft PC ecosystem. Between early 2004 and early 2008, Apple shares increased by approximately 2,000 percent, or 20 fold. Since early 2008, Apple shares have increased another 3 to 4 fold. Most people did not really appreciate the “new” Apple until the success of the iPhone in 2008. Clearly, the largest percentage gains came well before the general public fully understood the new ecosystems that Apple had created.

AMD using a similar diversification model as Apple

AMD has been hard at work over the last few years on a similar plan to diversify their sales away from competing head on with Intel in the PC ecosystem. AMD is focused on providing semi­custom or embedded versions of their proprietary APU architecture to companies that want to differentiate their products. Unlike the PC or Tablet space, once a company commits to a semi­custom/embedded chip, it is highly unlikely that AMD’s competitors will be able to replace it for many years.

The first such wins were in the game console area, where AMD is now supplying chips or technology to all 3 of the top companies. So, despite the fact that AMD has said they have a pipeline of 1 to 2 additional Semi­custom deals per year going forward, Wall St. still regards AMD the same way they did Apple back in early 2004. Instead of focusing on the huge growth in AMD’s semi­custom/embedded area, Wall St. continues to focus on AMD’s PC division.

AMD has 2 Basic Businesses, and both are Duopolies

AMD has 2 main businesses based upon specialized IP. Even though the server chip business is distinct from PCs, they both use the same basic CPU cores, while the discrete graphics area uses completely different IP. In the PC/server area, AMD's only real competitor is Intel. In the high-end graphics area, AMD's only true competitor is Nvidia. While Intel is increasing its efforts in the graphics area, they have been mainly relegated to lower level products, leaving only AMD and Nvidia to compete in the high-end space.

In almost all cases, Duopoly competition produces consistent profitability for the #2 company, except in heavily capital intensive businesses. When an industry requires very high capital expenses to remain competitive, the larger more efficient manufacturer can increase market share and profits, while the #2 company loses money. In the past, with the exception of a few product cycles, when AMD was first to market with an innovative design,

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 3 By Ken Luskin [email protected] October 28, 2014 Intel consistently used their manufacturing prowess to starve their significantly smaller competitor of profitability.

What has changed?

Since AMD sold off their manufacturing operation, the competitive dynamic with Intel has changed. AMD now has access to foundry powerhouses, each of which have enough capital to take on Intel at the most advanced process nodes. This means that in 2016, when both companies will be using the same process node, the competitive battle will be mostly based upon design, and not on manufacturing.

The next era of computing favors AMD

Rather than rewrite an entire article I authored with the above title, I highly recommend readers simply click on it.

It is important to note that after my article about the next era was written, Facebook spent $2 Billion to acquire Occulus VR, which CEO Zuckerberg described as a potential future computing platform. Additionally, augmented reality company, MagicLeap, just received $542 million in funding from Google and others. Both companies will rely upon powerful graphics by connecting to a PC/game console, or by a wireless connection to the cloud. Either way, powerful graphics are required.

Below is a link to a companion article that I wrote which will further explain AMD’s strategic positioning: The Progression Of Natural User Interfaces Favors Advanced Micro Devices

Intelligent Investors follow top Industry Insiders, rather than Wall St. ANALysts

Despite all the top talent joining AMD, Wall st. continues to think they have a better understanding of the future than industry insiders. Clearly, top industry insiders know quite a bit more about the long term plans, technology, and products which AMD is developing than Wall St. ANALysts. So, what do these industry insiders know about AMD that Wall St. is missing? I will break down AMD by its various different intellectual property groups, and dig deep into what the short sighted Wall St. ANALysts are missing.

PART II: PC POTENTIAL

AMD’s 2016 PC market share, sales, and profits to increase dramatically

1) AMD’s Q3 2014 Computing Solutions &Graphics revenues = $781 M, appx. $281 M is Graphics, leaving PC revenues = only $500million compared to Intel's $9.2 Billion. In dollar terms, AMD has about a 5% PC market share.

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 4 By Ken Luskin [email protected] October 28, 2014 FROM Q3 2014 Conference Call: "New commercial client offerings from Dell, HP and Lenovo have started ramping resulting in approximately a 50% increase in our commercial APU shipments from the second quarter"

2) In Q2 commercial PC sales were only 10% of AMD’s total PC chip sales.

3) Intel’s commercial sales have been increasing while consumer is dropping, resulting in commercial market share up to 40% of total PC sales. The commercial sector is productivity oriented, while tablets in general do NOT provide the required functionality for running a business.

4) AMD is deliberately ceding sales of unprofitable lower priced PC chips, while increasing Average Selling Price (ASP) by focusing on the commercial sector, and on consumers who want SUPERIOR GRAPHICS, at substantial discounts to Intel’s products.

5) The result is a relatively small amount of total PC chip sales left for Intel to take from AMD during 2015.

6) Currently AMD’s consumer sales are about $425 million/quarter. Factoring in that AMD's consumer PC sales will continue to drop in 2015 by appx. 15% = ~ $250 million decline for all of 2015

7) Factoring in expectations that AMDs' PC commercial PC chip sales will continue to grow by at least 50% next year. Current quarter= $75 million or $300 million annualized, growing by $150 million to $450 million in 2015. While some may consider this to be an over positive prediction, $450 million in commercial sales equals slightly more than a 3% market share, as measured in $ dollar terms.

8) Therefore, AMD’s total PC chip sales will decline by only $100 million, in 2015 to around $1.9 billion.

9) I expect AMD’s 2016 PC market share, ASP, sales, and profits to increase dramatically because:

a) AMD will continue to increase commercial PC chip sales mainly because Q3 2014 was the first Q that AMD sold commercial chips using an ARM licensed “trust zone” security core. Intel used its 2010 purchase of McAfee to include a security core in its chips, which AMD did NOT have until Q3 2014. The lack of a security core in AMD’s chips made it virtually impossible for AMD to compete with Intel in sales to rightfully paranoid/security minded corporations and Governments. The result was that AMD held only a about a 1% market share in commercial sales, ( as measured by $ revenues NOT units) versus about a 7% share of consumer sales ( as measured by $ revenues, NOT units)

b) As GRAPHICS become increasingly more important to computing, the superior VISUAL performance of AMD’s APUs versus Intel’s integrated graphics, will become a key differentiating factor.

c) Legendary ex Apple CPU guru Jim Keller and his team are creating a new CPU architecture for sale in late 2015/early 2016. A CPU core that is competitive with Intel, combined with AMD’s superior graphics and HSA innovations, will produce an APU that becomes the new industry gold standard.

d) AMD will be using a 14nm FinFet process node in 2016, the same as Intel. 2016 will be the first year in a decade that AMD is selling chips based on the same advanced process node as Intel.

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 5 By Ken Luskin [email protected] October 28, 2014 e) High Bandwidth Technology (HBM) will solve the Graphic bottleneck problem in AMD’s new HSA architecture APU chips. The HBM technology will be further discussed in the following section on Graphics.

10) AMD announced during Q3 CC that both of the new semi­custom design wins are to ship in 2016. These design wins are timed to correspond with 14nm FinFet volume production, which indicates that most of the new Keller’s designed CPU architecture is complete. Large sophisticated companies that can afford to commit to a semi­custom deal, would most likely not award a final deal until the bulk of the basic product architecture was complete.

11) Based upon the new design wins, it can be surmised that Jim Keller’s new CPU architecture is top notch. The new CPU architecture may even contain breakthrough innovations***

*** Soft Machines Debuts VISC CPU Architecture With 3X Better IPC – AMD a Chief Investor http://wccftech.com/amd­invest­cpu­ipc­visc­soft­machines/

>>>"The end result is mighty impressive. The VISC implementation outpaced all other competing CPU cores without exception. Even outperfroming Intel’s Haswell core by a sizable 51%.”<<< >>>"The company didn’t go into the specifics of how this is achieved but they state that it’s compatible with any ISA (Instruction Set Architecture). Meaning we could very well see this technology adopted by Samsung and AMD in ARM and x86 CPU architectures."<<< http://www.pcworld.com/article/2838018/stealthy-startup-soft-machines-launches-virtual-cpu-cores-that-trounce-tra ditional-processors.html >>>"Soft Machines is noteworthy for who is backing it as well as the technology itself. Angel investors included fabless pioneer Gordon Campbell, former Intel senior vice president Albert Yu, as well as AMD, Samsung’s venture arm, GlobalFoundries, and the Mubadala investment group that backed AMD."<<<

http://semiaccurate.com/2014/10/23/soft­machines­breaks­cover­visc­architecture/

>>>" In any case the VISC concept is ISA agnostic and could be ported to run any ISA natively" >>>" At least on this benchmark, the Soft Machines architecture works well. The company claims it will draw between 1/4 and 1/2 the power or run at ~2x the performance of competing architectures across a variety of benchmarks. "<<< >>>"If you look at the test results above, the slowest of the competition is running at 1GHz, the VISC chip was running at a mere 350MHz and finished significantly faster. If only the Soft Machines core could run at clocks of four digits, that would be really impressive"<<< >>>" In addition to the core count scaling, if the clocks can climb above 1GHz, Soft Machines’ claims of it being ‘server class’ performance seem quite reasonable."<<<

KEY POINTS: A) The combination of AMD, Mubadala, and Global Foundries (Mubadala owns 20% of AMD and 100% of GF) as significant owners, plus Sanjay Jha (ex COO of Qualcomm) and current chief executive officer of GlobalFoundries, as chairman of Soft Machines, will most likely act a block to prevent a sale to Intel or Qualcomm. Samsung is a partner with Global Foundries in 14nm FinFet production, which leads me to believe that the major controlling shareholders will keep this technology for themselves. AMD is the best way to participate, as Samsung is far too large and diversified.

B) The fact that AMD had the insight to invest in Soft Machines, and brought in Mubadala and Global foundries, indicates to me that Jim Keller's CPU team has been working on a similar approach for the last couple years. It is distinctly possible that AMD could already be incorporating this approach into faster and more powerful 64 bit cores, rather than the lower power 32 bit prototype from Soft Machines. Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 6 By Ken Luskin [email protected] October 28, 2014

PART III: DISCRETE GRAPHICS & HBM

From a Nvidia HBM presentation dated June 14, 2014

What is High­Bandwidth Memory (HBM)? It enables systems with extremely high bandwidth requirements like future high­performance GPUs ● Exploits very large number of signals available with die­stacking technologies for very high memory bandwidth ● reduces I/O energy costs ● Enables higher fraction of peak bandwidth to be exploited by sophisticated memory controllers

For comparison: Highest­end GPU today (Nvidia GeForce GTX Titan Black) : 384b GDDR5 @7Gbps= 336GB/s Future possible GPU with 4 stacks of HBM: 4 stacks HBM@ 1­2 Bbps= 512 GB/s to 1 TB/s

At lower overall DRAM system power: 18­22 pJ/bit for GDDR5 VS ~6­7 pJ/bit for HBM

JEDEC standard JESD235, adopted Oct 2013

Standard does NOT define: ● Internal architecture of the stack ● Precise DRAM timing parameters

What is most interesting about the above Nvidia presentation? Nvidia was a key member of the competing HMC Consortium’s approach to 3D DRAM, based upon Micron Technology DRAM manufacturing process. AMD had long been working on promoting its 3D DRAM approach into the JEDEC standard which was approved in 2013. Then, in March 2014, Nvidia updated its GPU Roadmap From the linked ANANDTECH article: “ At GTC 2013 NVIDIA announced their future Volta architecture. Volta, which had no scheduled date at the time, would be the GPU after Maxwell. Volta’s marquee feature would be on­package DRAM, utilizing Through Silicon Vias (TSVs) to die stack memory and place it on the same package as the GPU. Meanwhile in that roadmap NVIDIA also gave Maxwell a date and a marquee feature: 2014, and Unified Virtual Memory. As of today that roadmap has more or less been thrown out. Meanwhile Volta has been pushed back and stripped of its marquee feature. It’s on­package DRAM has been promoted to the GPU before Volta, and while Volta still exists, publicly it is a blank slate. We do not know anything else about Volta beyond the fact that it will come after the 2016 GPU. Which brings us to Pascal, the 2016 GPU. The bulk of what we wrote for Volta last year remains true: NVIDIA uses on­package stacked DRAM, allowed by the use of TSVs. What’s new is that NVIDIA has confirmed they will be using JEDEC’s High Bandwidth Memory (HBM) standard. Wrapping things up, with an attached date for Pascal and numerous features now billed for that product, NVIDIA looks to have to set the wheels in motion for developing the GPU they’d like to have in 2016”

December 2013: AMD and Hynix announce joint development of HBM memory stacks

“Bryan Black, Sr Fellow and 3D program manager at AMD noted that while die stacking has caught on in FPGAs and image sensors “..there is nothing yet in mainstream computing CPUs, GPUs or APUs” but that “HBM (high bandwidth memory) will

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 7 By Ken Luskin [email protected] October 28, 2014 change this.” Black continued, “Getting 3D going will take a BOLDmove and AMD is ready to make that move.” Black announced that AMD is co­developing HBM with SK Hynix which is currently sampling the HBM memory stacks and that AMD “…is ready to work with customers.” Minsuk Suh, principle engineer at Hynix confirmed that they are reading both 3D stacked memory for main memory and 3D stacked HBM for networking and graphics applications. JEDEC specifications for these products are “mostly finalized.” Suh indicated that the first application for HBM would be GPUs and that it will next move to networking and HPC applications.”

HYNIX PUBLIC materials on HBM:

Hynix PDF presentation August 2014: http://www.setphaserstostun.org/hc26/HC26­11­day1­epub/HC26.11­3­Technology­epub/HC26.11.310­HBM­Bandwidt h­Kim­Hynix­Hot%20Chips%20HBM%202014%20v7.pdf

CONCLUSIONS:

1) AMD will incorporate HBM technology into its GPUs starting in early 2015

2) “Nvidia will be using 3D stacked memory on its GPUs starting with Pascal in 2016, a full year after AMD. Volta was Nvidia’s scheduled GPU for 2015 that was supposed to use the Hybrid Memory Cube or HMC for short which was s 3D stacked memory technology competing with HBM. However after HMC’s development fell behind the roadmap it put a lot of pressure on Nvidia to look for an alternative technology, which they did.” ­WCCF Tech http://wccftech.com/amd­20nm­r9­390x­feautres­20nm­hbm­9x­faster­than­gddr5/

3) HBM will give AMD a major advantage over Nvidia in 2015!

4) AMD will integrate HBM into its APUs, continuing its advantage over Intel in graphic performance.

All of the above explains why in October 2013 Jean­Christophe Baratault, the head of Nvidia’s most profitable division left to join AMD.

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 8 By Ken Luskin [email protected] October 28, 2014 PART IV Game Console Sales Dynamics for 2015 & Beyond In 2014, AMD’s sales of game console chips will account for approximately $2 Billion out of a total of $5.5 Billion. Therefore, it is extremely important to understand the game console business.

Backwards incompatibility creates console upgrade delay 1) Similar to most consumer electronics, Game Consoles are useless without content. The current Xbox1 and PS3 are similar to previous models, in that they are NOT backwards compatible. In other words, new games created for the current consoles do NOT work on the old consoles, and games created for the old consoles do NOT work on the current models. Backwards incompatibility creates an impediment for existing console users to quickly switch to the new consoles, because of the significant amount of content created over the last 9 years, which will NOT work on the new models. AMD’s PC chip architecture will allow faster upgrades in the future 2) Because both Sony and Microsoft have standardized on a PC type architecture supplied by AMD, its probable that future models will be backwards compatible. The potential for compatibility using the same architecture will allow both companies to greatly reduce the time between upgrades to more powerful models. The key positive for AMD, is that both companies are now locked into using AMD’s architecture for future consoles, if they want them to be backwards compatible for all the software that is currently being created. 2015 will be the third Christmas on the current models 2) The backwards incompatibility dynamic results in the vast bulk of existing users waiting for a critical mass of content becoming available for the latest models, before deciding to buy a new console. The last 2 console cycles reveal that it took until the third year after launch for sales to peak. Game developers tend to time new releases to correspond with the crucial Q4 Christmas sales surge. Because the recent consoles were launched during Q4 2013, the third Christmas season will fall in calendar year 2015.

Size of existing user base, & sales from coming of age children 3) The best way of estimating the number of active console users, can be gained by looking at the Xbox live subscriptions, which were about 50 million previous to the launch of the current Xbox1. Since the PS3 sold approximately the same number of units as the Xbox360, it is logical to assume that there are also about 50 million active PS3 users.

4) In addition to existing users, every year tens of millions of children become old enough to want and potentially receive a new console as a gift. In 2002 there were about 10 million children born in N. America and Europe, half of which are middle class, and should be able to afford a game console. While the combined number of middle class born in India, China, and the rest of the world is estimated to be at least twice as large and growing. So, worldwide the number of children from families with the enough income to afford a game console is at least 15 million. If 20% of these children actually receive a game console, that adds an additional 3 million new users a year to the base.

5) The decline in the number of children receiving game consoles is not because of a lack of desire on their part, but because of a lack of household income. There is no doubt that owning a smartphone has become a requirement for all tweens. Clearly, in families that cannot afford to give their children a game console, a tablet, and a smartphone, its the game console that comes in last. As teens get jobs and more disposable income, a game console is still a desirable electronic gadget for the home. In upper class homes, children get a game console, unless their parents have a strong enough willpower to resist the constant begging.

Active game console users rarely switch to a PC

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 9 By Ken Luskin [email protected] October 28, 2014 6) Wall St ANALysts fail to understand the fundamental difference between: a) relaxing on a couch with friends and/or family and playing a video game on a widescreen TV b) Sitting in a chair at a desk, by yourself, playing a video game on a computer screen.

While playing video games on a PC is extremely popular in S.Korea, part of the fun is from going out to a PC bang, as they provide a social meeting place for gamers (especially school­aged gamers) to play together with their peers. Therefore, most people who enjoy playing video games at home, on a widescreen TV, while relaxing on a couch with friends/family rarely switch to only playing on a PC.

Analyzing the numbers 7) Combining the 7 million consoles sold in late 2013, with the appx. 20 million that will ship in 2014=27 million current models sold.

8) By the end of 2014 there will be a significant amount of content for the new consoles, most of which have dazzling graphics, which is superior to what is available for the old models. Based upon past cycles, there will be slight price reductions on the new consoles for 2015. Console gamers tend to be “plugged in”, and more susceptible to what their peers are doing than older TV show watchers. So, based upon past cycles, the amount of new content combined with price reductions should reach a tipping point with existing console users in 2015.

9) If we assume that 3/4 of the current user base will eventually switch to the new consoles= 75 million users, minus the 27 million sold = 48 million who will eventually switch. At least half of the 48 million, who are waiting for the right time to switch, will probably do so in 2015= 24 million.

10) When we add in at least 3 million children who will receive their first game console in 2015, the number of units sold in 2015 rises to 27 million.

Potential upsides surprise from China 12) Microsoft has just launched their Xbox1 in China, which is the first legal game console sold since China put a ban on sales in 2000. With 1.4 billion people, the upper 20% income class in China equals almost the entire population in the U.S. Without subsidization, the $700 iPhone is on pace to sell about 20 million units in China in 2014. Therefore, it would not surprise me if MSFT and Sony were able to sell a total of 4 million consoles in 2015.

13) In the absence of game consoles, PC gaming has become one of the fastest growing consumption categories in China. Wall St. ANALysts are quick to point out this a negative for the adoption of game consoles in China. I believe that game consoles offer upper class Chinese families the ability to spend time together, and share in the fun of video games versus the more solitary PC experience. Contrary to Wall St. ANALyst negativity, I believe the huge growth rates for Chinese PC video gaming indicates a great thirst for high level graphic video games. Phones and Tablets do not provide the high level graphics that are available on PCs and game consoles.

Bottom Line: a) History and human behavior suggest that game console sales in 2015 should be well above those in 2014, despite predictions from Wall St. ANALysts that sales will be flat.

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 10 By Ken Luskin [email protected] October 28, 2014 b) Because Sony and Microsoft want to sell more software, and NOT antagonize their user bases with backwards incompatible consoles, they are most likely to stick with AMD for their next models. c) The current models are NOT capable of properly rendering on the new 4K TV screens, that will become the defacto standard by Christmas season 2016. Therefore, I expect Microsoft and Sony to quicken the upgrade cycle, and will stick with AMD to insure backwards compatibility.

PART V: Server & Embedded

AMD’s server business, which includes processors and SeaMicro servers was about $75 million in Q3 2014, while the embedded revenues were also about $75 million. The annual total addressable market (TAM) for server chips and dense servers is at least $ 8 billion, while the TAM for AMD’s embedded business is about $7 billion.

To put AMDs’ $150 million for Q3 2014 into perspective, Intel’s Data Center Group, which is the platform for server, workstation, and storage computing had revenue of $3.7 billion for the quarter. AMD’s server chip business has a market share of about 2% compared to Intel’s 98%.

But, back in 2005, based upon breakthrough multi­core Opteron server design, AMD was able to take a 25% market share. A decade ago, AMD was first to 1GHz, the first to 64­bit(with consumer processors), and the first with dual and multi­core CPUs.

Here again, I lean heavily on the incredible track record of Jim Keller, as chronicled below by Anandtech: “Keller first joined AMD in 1998 after leaving DEC, having worked on the Alpha 21164 and 21264. Upon his arrival at AMD, Jim Keller immediately went to work on launching the K7. His next tasks were co­authoring the Hyper Transport and 64­bit x86 specs, in addition to working on the K8 architecture. It was the K8 architecture that really gave AMD a significant performance (and power advantage) over Intel, who was shipping Pentium 4 at the time. After his work on K8, Keller left AMD in 1999 and went to work at Sibyte (and later Broadcom after they acquired Sibyte).The stint at Sibyte/Broadcom was longer than his time at AMD, but in 2004 Jim Keller joined PA Semi as the Vice President of Engineering. Apple eventually acquired PA Semi in 2008, and Keller went with the team.”

While Keller left some stock option money on the table by leaving AMD in 1999 just before the Tech blow off in early 2000, he more than made up for it when Sibyte was bought for $2 Billion in Broadcom stock in November 2000. The PA Semi buyout by Apple in 2008, produced another substantial payday for Keller. Keller also showed excellent timing in decamping from apple in late July 2012, at close to the peak. Since originally joining AMD in 1998, Keller has produced incredible success for each and every company he has worked for, and I see no reason why that success should not be repeated again at AMD.

Besides IBM and Sun Microsystems, which do not sell their custom server chips to anyone else, and have continually declining market share, only AMD has the extensive server IP and talent to successfully compete against Intel in server chips.

Clearly AMD has had many past server chip design successes, but Chipzilla/Intel always had superior manufacturing capabilities, which it used to crush AMD over the last decade. But in 2016, AMD will have access to the same manufacturing process node as Intel for the first time in a decade, through the combined efforts of Samsung (an even larger company than Intel) and Global Foundries ( which is backed by Abu Dhabi’s $900 billion global wealth fund).

Server Conclusion:

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 11 By Ken Luskin [email protected] October 28, 2014 There is a powerful shift in IT purchasing power towards cloud companies, and away from the handful of server companies such as HP and Dell, that Intel controls through its monopolist/anti­competitive behavior. The largest cloud companies are designing their own servers, and to do NOT want to be beholden to an Intel monopoly for the chips they must buy. So, if Jim Keller’s team creates another breakthrough CPU core for use in PC and servers, AMD could quickly take back at least 25% of the server market from Intel.

Networking technology shift creating a huge semi­custom/embedded opportunity for AMD

as described in this Forbes article by Patrick Moorhead :

“ A new trend called “open networking” is emerging, allowing IT to take more control of their networking and knock down some of the barriers that prevented them from acting quickly. An unlikely leader in this trend is Dell, a company that is a leader in both servers and the clients connected to the servers. For years, Cisco Systems was the glue between these components, but as companies are clamoring for a different way of networking, Cisco Systems represents the old guard and companies like Dell and HP, who both have nascent networking businesses have an opportunity to grow quickly.

But why would the tides quickly turn to server vendors and not stay in the camp of the networking vendors? There are two key reasons; the first is a business reason and the second is a technical reason.

On the business side of things, companies like Juniper Networks, Alcatel-Lucent, and most importantly Cisco Systems, all have market share to protect. For the past 20 years they’ve done their best to lock customers in; now should be the time that they should be reaping their benefits. But like a dictator that holds their population down, eventually there is a revolt The status quo of networking is not acceptable and these companies want a more open approach. In the pitted battle between vendors and customers, it’s pretty clear who has the advantage. When customers have the ability to dictate where they spend their precious IT budget dollars, the market will come around to their way of thinking.

One the technical side, the other thing that will drive server vendors forward into networking has to do with what networking products look like these days. For years, networking products were far more specialized. That “black box” was vertically integrated and customers had little choice in what they bought. But today, the world of networking looks far less specialized, it looks far more standardized. In fact, it looks more like a server or PC than ever before from the CPUs and memory to other components. So the people with the best computer supply chains are suddenly advantaged. On top of that, the trend towards software defined networking (SDN) is pushing much of the functionality off of specialized (proprietary) devices onto more standardized devices, in some cases even running directly on servers.”

Embedded Conclusion:

As networking equipment shifts toward more standardized chips, combined with increased demand for graphics/video optimization and analysis, AMD stands to benefit. AMD clearly has far superior graphic technology than Intel, which could easily translate into AMD becoming the preferred vendor of powerful APUs, that run the networks of the future. The “old” AMD did not concentrate on any areas outside of PCs and Servers. The “new” AMD understands that numerous industries are demanding more powerful embedded chips to differentiate their offerings.

PART VI VALUATION

CURRENT VALUE The typical institutional investor badly wants certainty, and when they cannot get it they become baby lambs, and run for cover with the other sheep. Many times certainty is clearly impossible. But, if all their peers and the Wall St. ANALysts own something, that crowd power= certainty of not being alone when things go wrong. Losing in large crowd is acceptable to sheep. But, losing all by yourself could mean the end of your career. Its a behavior dynamic called job protection. So, when a stock has been going down, most institutions are scared to buy, or are selling and running under the couch to hide, because they are investment sheep. This explains why intelligent and independent minded investors have an advantage, especially when their focus is for the long term. Intelligent long term investors dis­patiently analyze key valuation metrics, and compare them to other similar situations.

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,

Downloaded from www.hvst.com by IP address 192.168.160.10 on 09/27/2021 12 By Ken Luskin [email protected] October 28, 2014 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.

FUTURE VALUATION While AMD is trading below its private market value, based upon current business levels, Wall St. remains obsessively focused on valuing AMD based upon its future sales and earnings. Therefore, the following analysis will focus on the prospects for 2015 & 2016 sales growth, and most importantly, earnings per share.

2015 PC: Revenues = $1.9 billion and Profits = Zero Commentary: Despite my belief that HBM’s integration into AMD’s APUs in 2015 will produce substantial performance and efficiency gains, I tend to agree with the consensus view that old CPU cores are a major headwind in 2015 Discrete Graphics: Revenues = $1.5 billion and Profits= $150 million Commentary: HBM technology advantage over Nvidia will result in large increases in market share to at least 50% in both retail and professional graphics by the end of the year. With operating costs held relatively static, most of the additional gross profits will drop directly to the bottom line. 2015 Semi­Custom: Revenues = $2.4 billion and Profits= $500 million Commentary: As previously discussed, the third Christmas after launch of game consoles should result in a large increase in sales over 2014. 2015 Server & Embedded: Revenues = $700 million and Profits = Zero Commentary: While both server and embedded sales will continue to grow, AMD will increase marketing expenses in preparation for the launch of new CPU cores in late 2015.

2015 TOTALS: Revenues = $6.5 billion & Operating profits = $650 million LESS interest & Taxes of $150 million Net Profits= $500 million Fully diluted EPS of about 60 cents

2016 PC: Revenues= $3.5 billion and Profits = $500 million. Commentary: While practically nobody can envision AMD ever increasing market share in PCs, that is precisely what will happen in 2016. On a Dollar basis, I am assuming that AMD’s market share will increase from 5% to about 10%. Additionally, I am assuming that most of the increase in gross profits will fall directly to the bottom line. A 10% PC market share is a minimum level that AMD traditionally held in its worst of times over 3 decades, that is up until the last few years. 2016 Discrete Graphics: Revenues = $1.8 billion and Profits = $250 million Commentary: Instead of AMD starting the year with 35% of retail and 25% of professional market share, AMD will enter the year with about 50% in each sector, and the momentum from technology leadership. 2016 Semi­Custom: Revenues = $2.4 billion and Profits= $500 million. Commentary: At least 2 new semi­custom design wins in production, will offset a decline in game consoles chip sales. 2016 Server & Embedded: Revenues = $1.3 billion and Profits = $250 million Commentary: Keller’s new cores and a well developed ARM server ecosystem should allow AMD to increase its server chip market share to about 10%. Embedded revenues and profits should be accelerating as AMD’s chip are increasingly used in networking devices.

2016 TOTALS: Revenues = $9 billion and Operating Profits= $ 1.5 billion LESS interest & Taxes** = $ 200 million Net Profits = $ $1.3 billion Fully diluted EPS of about $1.60

** AMD has many $ billion in federal NOL carryforwards

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Future Valuation Conclusion As 2016 draws to a close, Wall st will be falling over themselves to invest in the “new” AMD. Wall St. loves a good momentum story, especially one where there is substantial upside from a very low market share base. In 2016, AMD revenues will be growing by 40% with net profits increasing by 150% over 2015. In late 2016 AMD will be seen as both a “cloud play” and a participation in the new open networking business. AMD’s growth momentum and large TAMs, should produce a premium PE of at least 25, equating to a market price of $40/share.

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