AMD is capacity constrained

THE BEST OF odd thoughts and rants come from the places you would least expect. This one had it's seeds at a Starbucks in Times Square, specifically a conversation about how AMD would have problems due to capacity constraints. The odd thought is that the capacity constraints might not be capping profit, and any downturn might not hurt AMD much.

The tale is long and convoluted, but it starts out with an analyst and I talking over a coffee and an evil strawberry milkshakeish creation. He was lamenting that AMD's brutal capacity constraints meany that there is little chance that they will beat their numbers. If you know you can make X units max, and your ASP is Y, your income for the quarter is XY.

One potential upside is that we hear AMD is skewing the product mix toward higher margin parts, notably Turions and Opterons. They may only be able to make X, but they are making more valuable units. While I doubt this will end up as an upside surprise, it won't hurt margins quarter over quarter.

The other interesting bit is a lot of people are talking down Vista and talking up how it will have a negative impact on PC sales over the non-denominational holiday festive season. The train of thought goes like this, people will not buy PCs for the sprouts because they won't have Vista. This will lead to doom and gloom, market collapse, and puppies with sad eyes looking up at you.

My train of thought goes like this: Bull. Most people don't know what Vista is or why they should care. Those that do know are aware that most PC makers have free upgrade programs in the works so you can buy now, bork you install with an upgrade later.

Sales may end up stinking this holiday season, but MS is blameless here. Those that know will realize they 'get Vista' already, but the other 99.5% won't care and will base their decisions on real important things like case color and price. Someone is covering up for something.

Lets say there is a slowdown in sales, why is this not a bad thing for AMD? Production capacity is beyond tight, they can't make enough parts. If sales slow, they will have less of a production gap, and will be able to piss off fewer of their customers with less parts allocation. They will in all likelihood sell no fewer parts than if sales were robust. While AMD's product mix may trend toward lower ASPs in a downturn, numerically units will be about the same.

Intel is making up the slack right now, for every part AMD can't ship, Intel can and happily will. If demand eases up by 5% for both, this means AMD will sell more less expensive chips, but Intel will probably sell fewer parts. It is quite an odd situation.

What it comes down to is that there looks to be a downturn, and AMD is pretty well insulated from it. It will affect them, but disproportionately lightly. In the unlikely event of an upturn, AMD will also be disproportionately affected, but in this case negatively.

The saviour parts for AMD arrive when the 65nm tap gets turned on in week 48. Soon after that, unit volume will go up and supply pressure will ease off. So will the vendor sniping that we at the INQ enjoy so much, and that is the real loss. µ