AMD's Q3 Surprises, But Street Stays Skeptical

Advanced Micro Devices (AMD) surprised the Street on several fronts with its Q3 earnings report. Revenues were higher than expected, even before a $191 million one-time licensing windfall that the analysts had not expected. The company had big growth in its graphics business, where it has been taking share from rival Nvidia (NVDA). And gross margins were higher than most had expected. All of that lead to a smaller than expected loss for the quarter. And that has the stock on the rise this morning.

But skepticism on the company’s longer-term prospects remain. While the company has finally unveiled its much-anticipated plan to spin off its foundries, the move doesn’t do anything to address its secondary position in its head-to-head battle with Intel (INTC). Nor does it provide an immediate cure for the company’s steady flow of red ink. Also note that the company’s Q4 guidance - it expects revenues to be flat with Q3 not counting the licensing gain - is disappointing given Q4 usually gets a seasonal boost from holiday PC sales.

Here’s a rundown on some of the commentary on the stock from the Street this morning:

• Glen Yeung, Citigroup: Maintains Hold rating. “With macro risk still looming and a lack of clarity regarding AMD’s new model still present, sufficient uncertainties in estimates keep us from taking a more positive stance on the shares at this time.”
• Sumit Dhanda, Bank of America: Maintains Neutral rating. “The case for a long-term investment in the stock remains tenuous at best…we still believe that leadership on the product and/or manufacturing front is a prerequisite for ownership of the stock, neither of which we believe to be imminent given the strong and likely sustainable product/manufacturing lead enjoyed by Intel.”
• Tim Luke, Barclays: “We are encouraged by recent funding, foundry and graphics progress, however, loss levels still remain significant, with weakening consumer PC demand and significant competitive pressure from Intel.” (Rating suspended due to Barclay’s role in the foundry deal.)
• John Barton, Cowen: Maintains Neutral rating. “While we are encouraged by AMD’s execution in a challenging environment, we believe it still faces competitive pressure from INTC as well as broader headwinds facing the semiconductor industry overall.”
• Rich Schafer, Oppenheimer: Maintains Perform rating. “We applaud AMD’s efforts to clean up its model but continue to view the stock as a ’show me’ story, awaiting the JV to close and the operating break-even goal to hit.”
• John Lau, Jefferies: Maintains Hold rating. “AMD’s numerous delayed product launches, vulnerable competitive position and low operating cash flow position compel us to stay cautious.”
• Mark Lipacis, Morgan Stanley: Maintains Underweight rating. “Until the company can deliver MPUs that can compete at the high end, where we believe the bulk of the margin in the industry resides, it will continue to struggle with its cash flow.” He also forecasts “below seasonal demand” in the first half, which he thinks will “drive utilization and margins lower, and translate to further cash burn for AMD.”
• Hans Mosesmann, Raymond James: Maintains Underperform rating. “AMD at the end of the day is a processor company, and with two battle fronts vs. Intel and NVIDIA (can you imagine any more formidable rivals?) AMD is unlikely to be able to be a broad-based supplier in graphics over time.”
• Patrick Wang, Wedbush Morgan: Maintains Hold rating, but write that he is “more constructive on shares of AMD as iut appears the company has remained on the road to profitability.”
• Michael McConnell, Pacific Crest: Maintains Sector Perform rating. “We continue to believe that AMD will be unable to make any type of market-share inroads versus Intel in the middle to high end of the desktop, mobile or server processor markets until its Istanbul architecture launches in the second half of 2009, at the earliest. Further, the company’s high debt load should continue to weight on the stock’s valuation.”
• Kevin Cassidy, Thomas Weisel Partners: Maintains Market Weight rating. “We are impressed with AMD’s Q3 performance, though we are not convinced it is sustainable.”

AMD today is up 29 cents, or 7%, to $4.41.