AMD-DELL alliance signifies a dyansty change

Back in January, I predicted that DELL would spit at INTEL and kneel to AMD by the end of 2Q06. Since then, more changes in the computing landscape led to this inevitablity. Both Intel and Dell have become financially fragile. For DELL, the situation is getting more alarmingly precarious.

As of May 3, DELL's net assets totalled $3.37 billion, or a bookvalue of $1.43/share. This means if one liquidates DELL today, all he can get back is less than $1.43 per share. DELL's lofty 17X price/book valuation can only be observed with small bio-tech companies. Unless DELL sustains a level of hyper-growth, its market cap will suffer a total crash. We are talking about 2-4x bookvalue, or $3-$5 share price here. As we have seen from the case of Enron, crash of stock price may lead to loss of borrowing power and eventually bankruptcy.

Without the AMD annoucement, DELL's stock could have collapased on May 18, 2006, in the wake of DELL's 18% year/year profit fall and HP's strength in a growing PC market. Because of the AMD announcement, most of the attention were diverted to the AMD alliance. But a mere AMD announcement doesn't mean DELL's problems have gone away. In fact, DELL will face even greater danger in the days ahead, as investors try to identify real growth prospects in DELL's vague AMD plans in an effort to justify DELL's valuations.

DELL is a scared kid. It's scared because its stock is already nose-diving and it knew that it stuck with Intel for too long. It shedded tears only because it saw its coffin. It was even more scared of going AMD. It didn't know how the Wall Street would react: would the Street dump DELL because of the fear of losing Intel's favourite treatment, or would the Street greet its decision to go AMD as another growth oppurtunity?

That was why DELL choose to limit its commitment to AMD in its earnings release statement. It was trying to test the Street's reaction. And the reaction was quite positive. Instead of crashing below $20, DELL's stock went up a few percent. In fact, the Street expects that four way servers are just the beginning, DELL is going to do more AMD and get more growth.

The math is simple. AMD has 22% of the x86 market. Going AMD could potentially lead to 20% growth for DELL. DELL should look at the AMD market this way: it's like a nation bigger than China and India combined. DELL keeps bragging about its growth in China, but its sales there is very small. DELL only sold 1.5 million units in China last year (2005). In comparison, the AMD market size is 50 million units/year. There is a lot of growth oppurtunities in the AMD market. That's the kind of growth the Street expects to keep DELL valued at $55 billion.

Intel is a sinking ship. Conroe/Woodcrest will not change Intel's fate of doom even if they perform faster than current K8. They are too few, too late and too archaic. They will only bleed Intel more on majority of Intel's units -- P4 and Core Duo. When Conroe eventually ramp up and Woodcrest finally gets validated, AMD will leap further ahead. We expect AMD to demonstrate major innovations in its June 1 technology conference.

Even if DELL enjoys a preferential pricing from Intel, such favoured status has little residual value at this moment. Intel's pricing has already collapsed. Getting 20% more discount on something dirt cheap is not big differentiation. For DELL to sustain the expected revenue growth, it must adopt AMD platforms across the board, it must grab its share of the AMD pie. Failure to adopt AMD in a wider market will lead to an additional Osborne effect on DELL's products: in addition to the Conroe Osborne effect, DELL's other products would also suffer from AMD64 Osborne effect. On the other hand, DELL going AMD across the board will inspire investor confidence in DELL's long term growth prospects and even forgiveness of DELL's short term misfortunes.

Intel has lost the technonology battle, it's also morally bankrupt. Those guerilla benchmarketing ploys totally lack intellectual integrity and are bordered on fraud. It's no longer cool to boast about products based on Intel's outdated FSB technology. It's foolish to defend Intel primitive and outdated FSB technology against AMD64. Increasinly, Intel is trying to use new branding and bundling to eat the lunch and dinner of all others in the PC food chain.

Intel is self-inflicting massive wounds and bleeding in a feeble attempt to slow down the advance of AMD64. DELL will inevitably suffer severely from Intel's pre-death struggle in the next three quarters and beyond.

AMD64 is the only thing that can save DELL from total collapse. A Pax AMD gurantees a profitable future for the PC industry to all of its participants. Graphics, chipset, networking, wireless, server, notebook and desktop vendors can all benefit.

I hope DELL's Opteron move will put more pressure on SUN to deliver more Galaxy designs. SUN should produce something like HP DL385, a 2U small business workhorse with 2 CPUs and 6 hard drives. SUN should also take advantage of its Solaris 10 OS to create turn-key integrated web and storage solutions for the mass market.

For IBM, my suggestion is to recoup the Hurricane chipset development cost by selling it to Intel and move to Opteron.