AMD Radeon 5700 Series and the Perils of Pre-Launch Price Cuts
In an unusual play at the market, AMD (NASDAQ:AMD) announced on July 5th that they were officially dropping the price of the Radeon RX 5700 Series as it 'embraces competition'. But, AMD's Scott Herkelman leads many to believe that the company 'jebaited' the competition on July 4th with a cryptic tweet. There is a bit more going on here than just price cuts that could have an impact all around. I felt one of the best ways to tackle this topic was to recruit a leading member of our excellent finance division for a bit of a Q&A regarding this from more angles than just anxious fans and the in-the-know consumer, so Adrian joins us today. As such, please remember that this article will also be tagged Finance so ensure to follow the commenting rules. But before we get to the questions we need to look through the back story for a bit of context.
Planned or Reactive?
On the subject of whether this was planned or reactive, we're just going to have to follow the timeline and use a bit of conjecture for this one as I don't believe we'll get a 100% answer from anyone on this. AMD announced the Radeon RX 5700 Series in its entirety during their Next Horizon Gaming Event 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, then still 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 performance claims while others going on to coin the newer term AMgreeD. On July 2nd NVIDIA pulled the curtains on their new SUPER line featuring the RTX 2060 SUPER which brought near RTX 2070 performance and more VRAM to the market for $399, their RTX 2070 SUPER which comes close to the RTX 2080 while adding NVLink SLI support back to the 70 Series for $499, and the still somewhat mysterious RTX 2080 SUPER for $699. Most every reviewer found the cards in a good price to performance range and found the cards to perform very well. This led to concerns with the positioning of the upcoming Navi based Radeon RX 5700 Series and their ambitious pricing against their competitor. In comes the shift. July 4th Scott Herkelman of AMD dropped a cryptic tweet claiming 'Jebaited', a term used for the emote on twitch of Alex Jebaily looking confused and also a term the twitch community prefers of the basic 'baited'.
— 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 simply didn't believe it 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 benchmark, which was pretty poorly executed, had gone viral making its way around the internet.
Then on Friday, July 5th the official email from AMD's marketing came through confirming price cut was indeed happening. But, the official messaging is void of any 'bait' wording and simply points to competition as their driving factor in updating pricing for the Radeon RX 5700 Series. One 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, but end up 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 as a way to garner goodwill with gamers since if you're trying to maximize margins you can always pull back pricing but increasing causes a whole world of problems.
AMD embraces competition, which drives innovation to the benefit of gamers. In that spirit, we’re updating the pricing for Radeon RX 5700 Series graphics cards. pic.twitter.com/L1ZbCUSi9z
— Radeon RX (@Radeon) July 5, 2019
Did AMD Actually Bait NVIDIA?
To play off the baited part, let's look at NVIDIAs actions. They knew Navi would be launched at E3, AMD was very open about that back at Computex when they announced more would be revealed at that time. But, the SUPER cards, in lesser-known names, had been leaked prior so it was known that NVIDIA was working on a refresh. A mid-cycle refresh isn't unheard of with the company after all the GTX 1080Ti and the GTX 1070Ti came to market a while after the launch of Pascal and neither one carried a Founders Edition premium, a similar move with the SUPER refresh. The GTX 1080Ti offered right 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 same price as the GTX 1070FE at launch. After 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, take that for what you will.
I have to agree with Josh over at PCPer when it comes to this part of the argument in terms that they didn't "set 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 up performance with nearly 1 yo RTX parts. They had to figure that NV would respond. So once NV did, then they adjusted downward. It is a reasonable reaction, but I don't think they "set a trap" for NV in terms of pricing.
— Josh Walrath (@JoshDWalrath) July 6, 2019
The market response is more than just fans who want to buy the cards, those are the easiest to see. If someone had the money set aside and were ready to jump aboard the Navi train now get to do so at a reduced cost of entry, or can now step up to that 50th Anniversary Model for the same amount if they were already set on the RX 5700XT for the same change. But there are reviewers who were either wrapping up their reviews who are now rethinking conclusions, or worse if they had finished filming now have to go back and refilm/re-edit/re-render all on a holiday weekend (if they're in the US). There's, of course, the undecided, that suddenly sounded political, who will look at this in an interesting light. While fans and people positioning products for review standing enjoy seeing pricing shift the average joe may not see it as entirely a positive message. Of course, this portion includes a bit of conjecture so hear it out. Often the typical consumer who doesn't pore over 15 reviews before buying a graphics card might see a prelaunch price reduction announcement as a sign of weakness against their competitor, as 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, but 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 part that is getting looked over and that is the shareholder and investor aspect. AMD and NVIDIA are both publicly traded companies, and as such, they're for-profit entities who are beholden to shareholders above all. I get that we all want to think of them as good guys for the gamer, but they're making the most enticing products they can in hopes that they can be the one the consumer goes with. That, in turn, raises revenue and makes profits flow, profits are key for growth and the best way 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 move may have affected them.
AMD Price Cuts - The Financial Interview
Adrian is the Editor of the Wccftech Finance section and has worked in finance for 20 years, here he looks at the investor landscape surrounding the sudden price drop.
Q: What could be the potential concerns shareholders might have with this sudden price drop?
A: Investors, in general, should always be looking for a company to maximize the possible returns they can make on their product offering. Given that, it's not unusual throughout the lifespan of a technology offering that prices decrease as newer products come to market boosting competition and the manufacturing process 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 because you don't necessarily know over the lifetime of the product exactly how market conditions may change so basing your pricing on some theoretical average cost of production over the lifetime of the product is going to be tricky unless you have commitments from your supply chain as to the cost of production over time. Even then, the costs of supply is only one half of the market equation and you need to also factor in the price you can charge. Given that you never know if at some point during the product life cycle you may need to cut costs to a point where production costs aren't covered, maximizing profit at every stage of the product life cycle is probably the order of the day.
Given all this, it's a somewhat surprising thing for me to see that there is a hint AMD baited NVIDIA into launching with its announced launch pricing. dGPUs are basically a duopoly and the competition (at the price/performance points where it exists) is fierce as should be the way but it would be surprising to see a company pursue a strategy of attempting to prompt a competitor to price inappropriately then to reduce pricing. Making a product to compete is hard (as we have seen given the dearth of AMD offerings at the top end of the market), cutting prices isn't that difficult by comparison and realistically, NVIDIA has a brand and following that is generally going to accept a slight premium in cost terms over what AMD has at a similar performance level.
For these sorts of questions, it's important to remember that shareholders are legion and not all of them are going to have the same thoughts on the price drop. It's probably fair to say that they like seeing their company try to extract as much money as it can from its consumers but at the same time, this situation strikes me as a mistaken pricing strategy and ideally that's something a firm should get right for a product launch. AMD generally is viewed as having a reasonable amount of goodwill from its customers in that it is generally seen as a value offering so seeing phrases like AMgreeD being thrown around likely doesn't help that image. At the same time, where else are its users going to go?
Q: Everyone knows AMD left the high end of GPUs to Nvidia but are they still important to AMD when it has the CPU and APU console business?
A: AMD effectively ceded the high end dGPU space to NVIDIA several years ago. As gamers we don't like it of course as we want to see competition at all performance points but from a financial perspective it made sense given that CPUs are the bigger market. Designing and making chips costs a lot of money and AMD spent a lot of money on Zen. As we've reported in the past, the cost of being competitive in CPUs again was probably the high end GPU space and it's been great to see that AMD has again 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 situation (deals with China also contributed of course), but it's important to note that AMD has thus far only really executed on what I can only assume is part one of its turnaround strategy.
CPU competitiveness along with the console APU business are obviously important and where the money is in a lot of ways but one has to believe that AMD has aspirations to compete at the top end of the GPU space again and needs to maintain its market share lower down the price/performance curve to allow it to do that again in the future. From an investment perspective, the GPU space must be important to AMD. One only needs to look at NVIDIA to see what a company that gets its product and marketing strategy right in this space is capable of from a financial perspective. AMD is currently trading at a ridiculous PE (price to earnings ratio) of almost 40x, compared to NVIDIA (26x) and Intel (11x). Numbers like that aren't going to be maintained unless it can show growth in all of its markets. Now that the CPU turnaround is well under way, AMD must be repurposing some of the revenue it's gaining from that business to invest in the GPU side. They don't have to be number one, but being seen as a viable competitor to both Intel and NVIDIA is absolutely important to it for its current valuation.
Q: Do you think a move like this could deter people from investing in AMD?
A: It's certainly possible although I'd have thought not massively. As mentioned, the entire affair has a whiff of a pricing strategy gone wrong and while that's something that companies can obviously recover from, it's 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 system and the consumer (and even Disney NYSE:DIS) backlash resonated for a while. It's also important 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 likely be relatively small given the bigger things which are driving markets these days like the possibility of the Fed cutting rates, the trade war with 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 business while attempting to maintain its GPU business which is currently suffering from under investment. The GPU turnaround should be the next item on the agenda at AMD and as long as they continue executing on their long term strategy they're probably safe.
Do keep in mind 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 $2 a share just a few years ago and is now over $30 with a huge PE. From a pure investing perspective, it has a lot of ground to make up to maintain that kind of valuation.
Q: AMD spoke to investors during their earnings call regarding expected margins on upcoming products, do you think the numbers they gave were off the original pricing, or the new pricing provided it was actually a planned move?
A: It's a tricky call. If indeed this was a genuinely planned move, it's possible that they may have based margin statements on the reduced pricing. It's important to keep in mind that publicly traded companies heavily caveat forward guidance when they give it and the usual warnings about being unable to anticipate all market conditions and variables etc are usually given when firms do provide forward looking views. It's also important to remember that GPUs are just one aspect of the AMD product portfolio and that a company with a sizeable revenue base usually has some wiggle room to be able to hit its guidance, as well as probably building a bit of safety padding into its estimates.
Also do keep in mind 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 individual 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 as the company looks to focus on its services business. Given that the GPU lineup is just one part of a larger product portfolio in its lineup, transparency on the specific margin of the graphics division is harder and AMD can play around with numbers to potentially cover a small shortfall in margin assuming that's what it is.
Q: Is it possible that AMD is expecting so much profit from the CPU division 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 short, the answer is probably yes. Forward guidance is as much art as science and companies will 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 first contact with the main hostile force". This is true in business as well as in war and most firms would do well to heed this. Forward guidance is a tricky business and generally firms don't want to be too beholden to an exact sequence of events playing out in specific and precise order. As such, I'd have thought that AMD has the capability to absorb at least some of the price cut if not its entirety. It'll be interesting to watch their earnings after this!
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