AMD Radeon 5700 Series and the Perils of Pre-Launch Price Cuts

AMD Radeon 5700 Serial and the Perils of Pre-Launch Price Cuts

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

In an unusual play at the market, AMD (NASDAQ:AMD) appear on July fifth that they were officially dropping the price of the Radeon RX 5700 Serial as it 'embraces competition'. Just, AMD's Scott Herkelman leads many to believe that the company 'jebaited' the competition on July 4th with a cryptic tweet. There is a scrap more going on here than just toll cuts that could take an impact all effectually. I felt one of the best means to tackle this topic was to recruit a leading member of our excellent finance partitioning for a bit of a Q&A regarding this from more angles than merely anxious fans and the in-the-know consumer, so Adrian joins usa today. As such, please remember that this article will as well exist tagged Finance so ensure to follow the commenting rules. But before we get to the questions we need to look through the dorsum story for a fleck of context.

Planned or Reactive?

On the bailiwick of whether this was planned or reactive, nosotros're just going to have to follow the timeline and utilize a flake of conjecture for this one as I don't believe we'll get a 100% answer from anyone on this. AMD appear the Radeon RX 5700 Serial in its entirety during their Next Horizon Gaming Upshot at E3 this year revealing the Radeon RX 5700 would retail for $379 and compete with the RTX 2060FE while the Radeon RX 5700XT would retail for $449 and compete with the RTX 2070FE. But, they wouldn't be without fresh competition as NVIDIA (NASDAQ:NVDA) had already teased the new, and then notwithstanding under wraps, SUPER series was coming. The pricing for the new Navi based Radeon cards garnered mixed responses from audiences, some being okay with the higher than expected pricing due to the operation claims while others going on to money the newer term AMgreeD. On July 2nd NVIDIA pulled the defunction on their new SUPER line featuring the RTX 2060 SUPER which brought near RTX 2070 performance and more than VRAM to the market place for $399, their RTX 2070 SUPER which comes close to the RTX 2080 while adding NVLink SLI back up dorsum to the 70 Series for $499, and the still somewhat mysterious RTX 2080 SUPER for $699. Most every reviewer plant the cards in a good cost to functioning range and constitute the cards to perform very well. This led to concerns with the positioning of the upcoming Navi based Radeon RX 5700 Serial and their ambitious pricing against their competitor. In comes the shift. July 4th Scott Herkelman of AMD dropped a ambiguous tweet claiming 'Jebaited', a term used for the emote on twitch of Alex Jebaily looking dislocated and also a term the twitch customs prefers of the basic 'baited'.

Jebaited

— Scott Herkelman (@sherkelman) July 4, 2019

It didn't take long for articles spreading the rumor of an impending price drop almost immediately popping up after that tweet went out. In personal conversations, I told numerous people I just didn't believe information technology because the product hasn't launched and its performance is still unknown to the public, surely they wouldn't have played a game like this. I was convinced it was in reference to a leaked criterion, which was pretty poorly executed, had gone viral making its mode effectually the net.

And then on Fri, July 5th the official e-mail from AMD'south marketing came through confirming price cutting was indeed happening. But, the official messaging is void of any 'bait' wording and simply points to contest as their driving factor in updating pricing for the Radeon RX 5700 Series. 1 message is of a 'got em' variety while the other carries a reactive connotation. I've personally gone back and forth on whether I believe this was a planned move or not, just end upward falling on a mixture of both being possible. Perhaps they were aiming for the announced pricing but once the SUPER lineup was out they fell back to their backup pricing and used it equally a way to garner goodwill with gamers since if yous're trying to maximize margins y'all can always pull back pricing merely increasing causes a whole world of problems.

AMD embraces contest, which drives innovation to the benefit of gamers. In that spirit, we're updating the pricing for Radeon RX 5700 Series graphics cards. picture show.twitter.com/L1ZbCUSi9z

— Radeon RX (@Radeon) July 5, 2019

Did AMD Actually Bait NVIDIA?

To play off the baited role, let's wait at NVIDIAs deportment. They knew Navi would exist launched at E3, AMD was very open nigh that back at Computex when they announced more would be revealed at that time. Merely, the SUPER cards, in lesser-known names, had been leaked prior then it was known that NVIDIA was working on a refresh. A mid-cycle refresh isn't unheard of with the company afterwards all the GTX 1080Ti and the GTX 1070Ti came to marketplace a while after the launch of Pascal and neither one carried a Founders Edition premium, a similar motion with the SUPER refresh. The GTX 1080Ti offered correct at Titan performance for just a smidgen more than the GTX 1080FE launch pricing and the GTX 1070Ti came within spitting distance of the GTX 1080 for the aforementioned price every bit the GTX 1070FE at launch. Later on reviewing the SUPER cards and how smooth everything went with that it seems kind of difficult to believe something that only needed one driver sent for the press to use was rushed to market, have that for what you will.

I take to agree with Josh over at PCPer when it comes to this part of the argument in terms that they didn't "gear up a trap" for NVIDIA but if they did I don't believe NVIDIA was baited into releasing at the price point they did.

So basically they aimed high with prices and matched upwards performance with about 1 yo RTX parts. They had to figure that NV would answer. So once NV did, then they adjusted downward. Information technology is a reasonable reaction, merely I don't remember they "set a trap" for NV in terms of pricing.

— Josh Walrath (@JoshDWalrath) July 6, 2019

Market Response

The market response is more than merely fans who want to buy the cards, those are the easiest to see. If someone had the coin set bated and were prepare to jump aboard the Navi train now go to practice then at a reduced price of entry, or can now step upwards to that 50th Ceremony Model for the same amount if they were already set on the RX 5700XT for the aforementioned change. Only there are reviewers who were either wrapping up their reviews who are now rethinking conclusions, or worse if they had finished filming now take to become back and refilm/re-edit/re-render all on a vacation weekend (if they're in the Us). In that location'due south, of course, the undecided, that suddenly sounded political, who volition look at this in an interesting light. While fans and people positioning products for review standing bask seeing pricing shift the average joe may non run into it equally entirely a positive message. Of course, this portion includes a bit of conjecture and so hear it out. Often the typical consumer who doesn't pore over fifteen reviews before buying a graphics card might run across a prelaunch price reduction announcement as a sign of weakness against their competitor, equally in they're repositioning their pricing to meet the market. I'm not saying that the performance isn't there as the reviews aren't out while I'm writing this, just it is a very real thing for people who aren't die-hard enthusiasts to feel.

The reason the interview below exists is because of the office that is getting looked over and that is the shareholder and investor aspect. AMD and NVIDIA are both publicly traded companies, and equally such, they're for-profit entities who are appreciative to shareholders above all. I get that we all want to retrieve of them as skillful guys for the gamer, merely they're making the most enticing products they tin can in hopes that they tin exist the one the consumer goes with. That, in turn, raises revenue and makes profits flow, profits are key for growth and the all-time fashion to keep the people who are investing happy. I'm interested in carrying this topic into the realm where we look at shareholders and how this motion may have affected them.

AMD Price Cuts - The Fiscal Interview

Adrian is the Editor of the Wccftech Finance department and has worked in finance for 20 years, here he looks at the investor mural surrounding the sudden price driblet.

Q: What could be the potential concerns shareholders might have with this sudden toll drop?

A: Investors, in general, should always exist looking for a company to maximize the possible returns they tin can make on their product offering. Given that, it's not unusual throughout the lifespan of a engineering offering that prices subtract equally newer products come to market boosting competition and the manufacturing procedure gets refined. As the incremental cost of production generally lowers later on in the life of a product, this also drives costs down meaning that those savings can be somewhat passed onto consumers.

In general, running products as a loss leader in the early stages is less than ideal considering you don't necessarily know over the lifetime of the product exactly how market conditions may change then basing your pricing on some theoretical boilerplate price of production over the lifetime of the product is going to be tricky unless you have commitments from your supply chain as to the toll of production over time. Even then, the costs of supply is only ane half of the marketplace equation and you need to also cistron in the price y'all tin can charge. Given that you never know if at some signal during the product life wheel you may need to cut costs to a point where production costs aren't covered, maximizing profit at every phase of the product life wheel is probably the order of the day.

Given all this, it's a somewhat surprising thing for me to see that at that place is a hint AMD baited NVIDIA into launching with its appear launch pricing. dGPUs are basically a duopoly and the competition (at the toll/performance points where information technology exists) is vehement as should exist the way but it would be surprising to see a visitor pursue a strategy of attempting to prompt a competitor to price inappropriately and then to reduce pricing. Making a product to compete is hard (every bit we have seen given the dearth of AMD offerings at the top end of the marketplace), cutting prices isn't that difficult by comparison and realistically, NVIDIA has a make and following that is generally going to have a slight premium in cost terms over what AMD has at a similar functioning level.

For these sorts of questions, information technology'south important to remember that shareholders are legion and not all of them are going to have the same thoughts on the price drop. Information technology's probably fair to say that they like seeing their company try to extract equally much coin as it can from its consumers but at the same time, this situation strikes me every bit a mistaken pricing strategy and ideally that's something a firm should get right for a product launch. AMD more often than not is viewed every bit having a reasonable amount of goodwill from its customers in that information technology is more often than not seen as a value offering and then seeing phrases like AMgreeD being thrown effectually likely doesn't assistance that paradigm. At the aforementioned fourth dimension, where else are its users going to go?

Q: Everyone knows AMD left the high end of GPUs to Nvidia just are they however important to AMD when information technology has the CPU and APU panel business?

A: AMD effectively ceded the loftier end dGPU space to NVIDIA several years ago. As gamers we don't similar it of grade as we want to see contest at all operation points but from a fiscal perspective it made sense given that CPUs are the bigger market place. Designing and making chips costs a lot of coin and AMD spent a lot of money on Zen. As nosotros've reported in the past, the toll of being competitive in CPUs again was probably the high end GPU infinite and it's been keen to run into that AMD has once more become competitive with Intel (NASDAQ:INTC) in the CPU business. This is one of the underlying factors which has given way to the AMD stock turnaround and the underlying improvement in its financial state of affairs (deals with China also contributed of class), only it's of import to annotation that AMD has thus far only really executed on what I can only presume is part one of its turnaround strategy.

CPU competitiveness along with the console APU business are plainly of import and where the money is in a lot of ways but 1 has to believe that AMD has aspirations to compete at the top stop of the GPU space again and needs to maintain its marketplace share lower downward the price/performance curve to allow it to do that once again in the future. From an investment perspective, the GPU space must be of import to AMD. One only needs to await at NVIDIA to come across what a company that gets its production and marketing strategy correct in this infinite is capable of from a financial perspective. AMD is currently trading at a ridiculous PE (cost to earnings ratio) of nigh 40x, compared to NVIDIA (26x) and Intel (11x). Numbers like that aren't going to exist maintained unless information technology can show growth in all of its markets. Now that the CPU turnaround is well nether way, AMD must exist repurposing some of the revenue it's gaining from that business organisation to invest in the GPU side. They don't accept to exist number i, merely being seen as a viable competitor to both Intel and NVIDIA is absolutely of import to information technology for its electric current valuation.

Q: Practice you think a move similar this could deter people from investing in AMD?

A: It's certainly possible although I'd take thought non massively. Every bit mentioned, the entire thing has a whiff of a pricing strategy gone wrong and while that's something that companies can plain recover from, information technology'southward also something which investors don't like to see. That much said, no company is perfect and everyone makes missteps along the way. EA (NASDAQ:EA) is a classic case with the disastrous launch of SWBFII wiping out over $3 billion in shareholder value given its controversial monetisation loot box organisation and the consumer (and even Disney NYSE:DIS) backlash resonated for a while. It's as well of import to note however that institutions invest very differently from retail investors and are generally making longer term calls on companies and not reacting to every piece of good or bad news by buying or selling more stock.

If there is a market reaction, it'll probable exist relatively modest given the bigger things which are driving markets these days like the possibility of the Fed cutting rates, the trade war with Red china cooling off. What you don't want to see however is a series of missteps which may lead the market to question the competence of the executive team, but overall AMD still seems to be pursuing a sound strategy of building its revenue in the CPU/APU concern while attempting to maintain its GPU business organisation which is currently suffering from under investment. The GPU turnaround should be the next detail on the calendar at AMD and equally long as they continue executing on their long term strategy they're probably prophylactic.

Exercise proceed in listen though that anyone who isn't already in AMD stock but considering jumping on the bandwagon has really missed out on what is probably the majority of the gains. AMD was trading down in the doldrums of $two a share just a few years ago and is now over $30 with a huge PE. From a pure investing perspective, information technology has a lot of basis to make upward to maintain that kind of valuation.

Q: AMD spoke to investors during their earnings call regarding expected margins on upcoming products, do y'all recollect the numbers they gave were off the original pricing, or the new pricing provided information technology was actually a planned motility?

A: It'due south a catchy phone call. If indeed this was a genuinely planned move, it's possible that they may have based margin statements on the reduced pricing. It'south important to go on in heed that publicly traded companies heavily caveat frontwards guidance when they give it and the usual warnings virtually being unable to anticipate all market place conditions and variables etc are ordinarily given when firms practice provide forward looking views. It's also of import to remember that GPUs are just ane aspect of the AMD product portfolio and that a company with a sizeable revenue base of operations usually has some wiggle room to exist able to hit its guidance, as well every bit probably building a bit of safe padding into its estimates.

Besides practise go on in heed that AMD doesn't break out its product lines on its earnings reporting that much. GPUs are lumped in with CPUs from a reporting perspective. Companies sometimes break out private products when they are star performers and analysts want a lot of detail like Apple (NASDAQ:AAPL) did with the iPhone for years but this has now been reversed every bit the company looks to focus on its services business. Given that the GPU lineup is just one role of a larger product portfolio in its lineup, transparency on the specific margin of the graphics division is harder and AMD can play effectually with numbers to potentially cover a small shortfall in margin bold that's what information technology is.

Q: Is information technology possible that AMD is expecting so much profit from the CPU partitioning they can slim down the margins of their GPU business without impact?

A: Hah, I should've read this before fully answering the previous question. In brusk, the reply is probably yeah. Frontwards guidance is as much fine art equally science and companies volition usually allow themselves the ability to absorb a few variables in their predictions without having a major downside. Most people have probably heard the saying: "No plan of operations extends with any certainty beyond the showtime contact with the main hostile force". This is true in business also as in war and most firms would practice well to heed this. Forwards guidance is a tricky business and generally firms don't want to exist also beholden to an exact sequence of events playing out in specific and precise society. As such, I'd have idea that AMD has the capability to absorb at least some of the toll cutting if non its entirety. Information technology'll exist interesting to picket their earnings subsequently this!