Advanced Micro Devices: Stock Downgraded After Earnings Warning

In the aftermath of Advanced Micro Devices' (AMD) earnings warning last Thursday, Wall Street analysts downgraded the stock left and right (I guess some downgrades before the warnings would have been too much to ask for.) AMD said its fourth quarter results would be below forecast due to ASP pressures being applied by Intel (INTC) despite strong unit growth.

After watching AMD on the sidelines for some time, I argue that AMD's fourth quarter miss and subsequent bloodbath were due to a sudden swing in analyst sentiment is a golden buying opportunity for investors looking out 12 months.

First, the negatives, which are numerous and were obvious a few months back, are now understood by Wall Street and are being priced in at 17 times 2007 numbers. AMD became a victim of its own success in 2005 and 2006 with massive share gains that may have been better received if they occurred in a stair-step fashion.

Second, Intel is clearly back with better products, pricing power, and a magnificent branding strategy that has silenced Hector Ruiz.

Third, AMD made it clear at its analyst day that the ATI acquisition would lead to substantial charges including inventory write-downs. YUCK, but I guess that was considered before the deal was done and used as negotiating leverage by AMD (let's hope.)

There are some negatives, in my opinion, that aren't priced in just yet. The potential for inventory issues for AMD's CPU business in 2007 could raise concerns in the first quarter. However, the fact that units were strong again should remove some inventory risk. And I know I am beating a dead horse here by reminding people that we are on the verge of a PC upgrade cycle that will play out over the next few years. I have written already that most analysts are looking for 7% PC unit growth in 2007, but I believe, after some backwards math, that PC unit growth will come in closer to 10% in the 12 months ending June, 2008.

Also, and this is a bit less talked about on Wall Street right now, I believe AMD will need to raise money between now and 2008 in order to carry out its expansion plans. After plugging capex plans and forecasting cash flow results for the next 24 months, I don't know how the company can operate without some sort of financing. (This issue could gain some exposure in the coming quarters, but hasn't been spoken of much to date.)

Other things to keep an eye on are AMD's tax rate, which waffles around more than some company's gross margins, Hector Ruiz's willingness to shut-up and execute, ATI's market share vs. white-hot nVidia, and results from company's such as Rackable Systems whose build to order scale-out servers often serve as a gauge on the INTC/AMD chip wars.

AMD/INTC 1-yr comparison chart

Comments

[David Jackson]

Excellent. Thank you.