Seeking Alpha
Profile| Send Message|
( followers)  
Oh, what a mess the Advanced Micro Devices (NYSE:AMD) story has become. The company reported earnings Tuesday afternoon that were even worse than the company had warned. The big issue was a huge drop in operating margins, which it blamed on a big drop in server processors. In short, AMD is locked in an ugly price war with a better-healed competitor in Intel (NASDAQ:INTC), and it is suffering the consequences. Analysts describe it in terms like “World War 3″ and “Celebrity Death Match.”

And there are fears if could get worse: Merrill Lynch’s Joe Osha notes that AMD’s Q3 miss was due to pricing pressure in desktop processors, and Q4 was due to trouble in servers; he suggests that Intel could now become more aggressive about pricing in the notebook market later this year.

The commentary from the Street this morning is downright mournful, as if AMD had been mortally wounded. While the few remaining bulls try to comfort themselves by looking at supposedly impressive new processors yet to be introduced, the bulk of the discussion revolves around why there is no quick fix for what ails AMD.

Downgrades

  • Michael Masdea, Credit Suisse: Downgrading to Underperform, from Neutral. While we have been secularly bullish on the CPU sector for years (We rate INTC Underperform), we thought AMD’s impending enterprise share-gains in desktop and mobile could offset the impact of an aggressive competitor. While our assumption on share gains are largely unchanged, the aggressive pricing dynamic nullify the gains…We believe both AMD and INTC are doing the right thing for their company. INTC is using its war chest to try and destroy AMD with pricing and AMD is leveraging its new found competitiveness to fight for survival through scale. However, we’d prefer to watch this celebrity death match from the cheap seats.
  • Chris Caso, FBR: Downgrading to Underperform from Market Perform, price target to $10 form $17.. While we think most were expecting a disappointing report from AMD, the situation appears to be much worse than expected, particularly with respect to margins. We do not agree with the premise that margin erosion has resulted from a price war, but rather believe that AMD no longer enjoys the technical advantage it had last year, and is losing share in the higher margin segments of the market. In addition, we feel this margin degradation means that AMD no longer has the cash flow to support its aggressive capex plans, creating a serious issue for 2007.
  • Doug Freedman, American Technology Research: Downgrading to Sell from Buy, price target to $12 from $27. We have clearly been wrong over-weighting the fundamental market conditions and have missed the bold fact that both sides are simply growing units at the expense of ASPs. The price war with Intel is taking its toll and we see no strategy changes from either AMD or Intel being implemented, even as numbers begin to turn towards the red. With no change in the share gain strategy from AMD or Intel, we see an increasing potential that both companies will squander what we believe to be an incredibly strong PC cycle. Also downgraded Intel to Neutral from Buy.
  • Still Bearish

  • Christopher Danely, J.P.Morgan: We believe the downside was driven by Intel’s aggressive pricing and superior products and we expect further downside to consensus estimates until AMD and Intel begin cutting capital expenditures….[It’s] World War 3 in microprocessors - stay out of the way.
  • Cody Acree, Stifel Nicolaus: Although AMD is optimistic that it can improve gross margin through the year, we see few drivers in the near term and therefore expect only a slight margin expansion in the coming months. Accordingly, we believe AMD will drop into significant losses until at least the middle of the year.
  • Eric Ross, ThinkEquity: We expect a painful, prolonged aggressive pricing environment throughout at least the first half of 2007…Intel should continue to score design wins and gain market share…With pricing as the primary difference, we believe Intel is better suited to win a long, drawn-out price competition, thus gaining market share back at AMD’s expense, especially with much of AMD’s attention diverted to execution of its merger with ATI. we reiterate out Sell rating [and]…$15 price target.
  • Glen Yeung, Citigroup: AMD guided [first quarter] revenues well below Street consensus, reflecting their concern that Intel will sustain (or even worsen) an already aggressive server pricing environment.
  • Hans Mosesman, Nollenberger Capital: AMD’s business model is fundamentally broken, in our opinion. The Street in our view does not realize this problem given AMD’s recent historical success in terms of market share…we are puzzled by what we consider management’s apparent naivete regarding its its goals for 50%gross margin and 20% computation product sales growth for 2007…Reiterate our Sell rating with an $8 12month price target.
  • Rich Schafer, CIBC: AMD faces numerous headwinds this year, with not only pricing pressure and potential server share loss to INTC, but also ATI integration distractions, deal dilution, capacity additions and corresponding capital needs. As such, we remain on the sidelines.
  • John Lau, Jefferies: Server business under siege…While Intel can use the increasing revenue and profit contribution from mobile MPUs to partially offset the impact of lower server pricing, AMD has no such cushion to fall back on to minimize the impact due to a price war…given a lack of near-term catalysts and deteriorating fundamentals, we are maintaining our Hold rating.
  • Joe Osha, Merrill Lynch: It’s clear that Intel is now competitive again after being caught flat-footed in 2005. Meanwhile, both companies are unwilling to back away from their capital spending plans. The result can only be more pricing pressure. Even assuming a PC demand boost from Microsoft Vista, we think the microprocessor industry will see at most low single-digit revenue growth in 2007.
  • Sumit Dhanda, Bank of America: While the consensus view will likely suggest that pricing and excess capacity were to blame, in our view these common arguments miss the bigger picture behind the factors clouding AMD’s profit outlook. Instead, we think that while the ASP decline clearly impacted revenue growth, the steep decline in AMD’s gross margins was more a function of an unfavorable cost structured due to limited 300mm/65nm volume production (in turn resulting in high unit costs from continued production of dual core CPUs at 90 nm…Still too early to call the bottom.
  • I have more gloomy reports sitting here, but enough is enough. It’s too depressing. There has to be a bullish AMD take around here someplace…aha!

    Still Bullish

  • Eric Gomberg, Thomas Weisel Partners: We have significantly diminished confidence in AMD’s ability to achieve the margin targets management outlined during its December 14 analyst day. Nonetheless, we are optimistic that AMD will experience sequential gross margin improvement in [the first quarter] due to less-severe ASP pressure and lower costs due to increasing 300mm/65nm production…Despite our optimism, we recognize that significant risk exists, particularly if Intel makes another aggressive price move, although we think that it is largely reflected in guidance and would hurt Intel at the same time…Maintain Overweight.
  • AMD was down 93 cents after hours yesterday at $16.08; Intel was up 31 cents at $20.86.

    AMD/INTC 1-yr comparison chart
    AMD INTC

    Source: AMD Suffers the Consequences of Processor Pricing Pressure