Enterprise Risk Analysis and Moat Strength

Assignment 1: Enterprise Risk Analysis and Moat Strength

Jack Welch Management Institute

JWI 531

Introduction

Computer Chips or Processors power every modern machine-like Computers, Cars, Phones, Avionics and Military systems and American Companies Including Intel which the leading company in Semiconductor industry is own the majority of market share with their Intellectual property in Research, design, Branding and Marketing.

Intel Corp (INTC) founded in 1968 based in California which became famous for its Pentium processors is the World leader in semiconductor/ micro-processor industry, with an annual revenue of 75 Billion dollars with a gross profit of 60% and an impressive EBITA of 43.7% for the period of 12 months ending March 2020(1).

On the other hand AMD which was founded around the same time in California competes in the Processor industry with a revenue of 6.7 Billion USD at a gross profit of 42.6% and an EBITDA of 6.3% for the 12 months ending in Dec 2019

This paper seeks to conduct a financial analysis on these two companies and provide recommendations for Action

Analysis and Recommendations

Where is each company in its corporate lifecycle (startup, growth, maturity or decline)? Explain.

INTEL – Intel is despite of being a 60 yr old company is in its Growth Phase (2) and the key reason for this is the fact that in the past 5 years Intel’s revenue has consistently grown in single digits from 55 Billion to 72 Billion at the end of Dec 2019. EBITDA has also consistently increased from 23.5 Billion at 42 % to 33.25 billion at 46% for the same period. The operating cash for this period has improved from 345 to 46%, while Capital expenditures have continued to increase, and a stock buy back was rolled out for 2019.

AMD – Can also be safely said to be in its Growth Phase, the company under the leadership of Lisa SU has turned around from the brink of bankruptcy (3) in 2014-15. For the past 5 years (4) has grown its sales from 4 Billion USD to 6.7 Billion USD at the end of 2019. The EBITDA has also seen an improvement from 4% to 12% of revenue in past three years. The operating cash flow has improved from -5% in 2015 to positive 7.3% in the year ending 2019.

Based on your review of the analysts’ reports and the 10-K reports, which company appears to have more risk? Why?

While both Intel and AMD are in their growth and some commonalities among then like majority of revenues coming from Overseas Operations, Long cycle of new product development, and Significant Competition from players like NIVDIA, Qualcomm and Texas instruments, there two key risks which leave AMD more vulnerable. Firstly, the fact that AMD relies on third party manufacturers for products which exposes it to IP and Supply chain Risks Vs Intel which controls its entire design and manufacturing business. Secondly Majority of AMD’s revenue come from a small number of customers Vs a more diversified business base of Intel.

Which categories of risk pose the greatest threat to each organization? Why?

Most Significant Risk Intel – Increased Competition on product innovation from companies like AMD, NIVIDIA, Broadcom etc. pose the greatest threat to Intel’s market revenue. Intel recently lost market share to AMD on account of AMD bringing a more powerful microprocessor to market. Increased competition is also putting pressure on Average selling price of Intels desktop platform.

Most Significant Risk AMD – Competition is again the most significant Risk as AMD tries to scale up its business from lows of 2014-2015. While AMD has seen some success with its latest innovation on 10 Nm microprocessor, its outsourced supply chain and relatively longer product innovation Cycle time leaves it vulnerable to losing customers to competition.

Which company has the stronger economic moat? Explain.

Between the two companies Intel definitely has a stronger Economic Moat on account of:

Superior Cost advantages – Intel Runs its design and manufacturing Inhouse providing it with the ability to control costs on its industry leading microprocessors. This is cost advantage is clearly noticeable in Intel’s financial report for 2019 with 46% EBTIDA

Engineering Know – the company has been at the forefront of cutting-edge innovation and possesses patents on technologies and designs which cannot be easily replicated by competitors.

For the company that has the weaker economic moat, what two risk factors should they prioritize to improve their risk mitigation and strengthen their competitive advantage? Make specific reference to the applicable risk-management tools discussed on pages 30-63 of The CFO Guidebook.

For AMD the two most Significant risk and their potential Mitigation strategies are

Competition – Competition is the most significant short- and long-term risk for AMD especially given the fact that most of its revenues from a small set of customers, even a loss of few customers in given year from see a significant dip in profitability. To mitigate this AMD needs to continuously innovate and provide superior service to existing customers, while working on signing up new contracts to diversify its customer base.

Supply Chain – AMD’s lack of full control over its manufacturing process poses a significant risk to its business model. While a Third-party manufacturing supports asset light strategy it typically increases the operating cost and leads to lower profitability which is the case here. To mitigate this risk AMD needs to maintain Regularly review its supplier watch list and replace quickly suppliers who may be having difficulties (5). In addition to this AMD should consider forming Joint ventures with strategic suppliers (6) as partnerships help suppliers to reduce costs, improve quality, and develop new processes and products faster than their rivals.

References

References

https://www.macrotrends.net/stocks/charts/INTC/intel

https://corporatefinanceinstitute.com/resources/knowledge/finance/business-life-cycle/

https://edition.cnn.com/2020/03/27/tech/lisa-su-amd-risk-takers/index.html

https://www.marketwatch.com/investing/stock/amd/financials

CFP guidebook – Supply chain Risk – Page 7 Chapter 3

https://hbr.org/2004/12/building-deep-supplier-relationships