Morgan Stanley Stays Bearish On Advanced Micro Devices, Says Market Is Overrating JV

Along with reporting its earnings, Advanced Micro Devices, Inc. AMD has announced that it had entered into a joint venture with a university investment group based in China, called THATIC.

Morgan Stanley’s Joseph Moore maintains an Underweight rating on the company, with a price target of $2.65.

The Joint Venture

As part of the joint venture agreement, AMD is to deliver core technology to build server microprocessors, which THATIC will use to build chips for the server market. These chips are meant exclusively for the China market and could potentially compete with Advanced Micro Devices.

THATIC has agreed to pay Advanced Micro Devices a total of $293 million over the life of the agreement, based on the latter company meeting specific milestones. Advanced Micro Devices will also have partial ownership of the joint venture and will receive royalties on the finished product’s sales, although details of both figures were not disclosed.

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Thoughts On The Deal

Moore believes that the deal is being overvalued by the market, and pointed out, “AMD prospects for servers, China, and IP licensing are not new, and limited disclosure makes JV valuation assessment difficult. Bottom line, we continue to see AMD as structurally subscale.”

Moore also questioned whether selling a license was the best way to deal with the China server opportunity, especially given that both opportunities in China and in server would be key to the company implementing a turnaround in revenues.

Although the joint venture could have a revenue impact, “IP sales have always been an avenue to improving the strains on the balance sheet, and while the size of the potential cash infusion here is nice, AMD hasn't given us the tools to figure out what the long term profit opportunity might be,” the analyst noted.