Advanced Micro Devices (AMD), which has lost money for four quarters in a row, has said it will get back to profitability when its quarterly sales rise above $2 billion and when it makes a gross profit greater than 40% of sales. Well, Thursday night the company reported that it hit the second of those two goals, with gross profit rising 8 percentage points from the second quarter to 41% in the third quarter. And the company showed some progress toward the second goal, with sales rising 18% from the prior quarter and coming in higher than analysts expected at $1.63 billion.
Friday, there were some deep divides on whether investors should stick with the company as it works its way back to profitability.
- Joanne Feeney with FTN Midwest reiterates her $20 price target on AMD shares and says better-than-expected sales, increasing average selling prices, and “stabilization” of AMD’s balance sheet give her confidence. “Last quarters results confirm our thesis that the price competition between the two has lessened,” she writes, referring to competition with Intel (INTC), “and we expect continued margin gains […] We see reduced uncertainty as its balance sheet has stabilized and gross margin recovered.” Her one caveat: AMD’s forecast for operating expenses to rise 6% in the fourth quarter “raises the bar to profitability a notch.” Still, she sees AMD “on a path to profitability in 2008.” Feeney is taking down her estimates slightly, forecasting $1.88 billion in sales for the fourth quarter, down from a prior $1.96 billion, and a 27-cent loss per share, excluding some items, down from an 11-cent loss.
- ThinkEquity’s Robert Burleson is maintaining his Buy rating on the stock and his $20 price target, like Feeney. He’s raising his estimates for sales in the fourth quarter to $1.825 billion from $1.75 billion, while lowering his loss per share estimate to 45 cents from a prior 51-cent estimate. While noting strong results across AMD’s product sales — with mobile processor sales hitting record levels — Burleson’s argument comes down to cheap valuation for AMD shares: “AMD is trading at 2.57x (net of cash and debt) its book value, at a discount to our Universe at 3.53x.”
- Stifel Nicolaus’s Cody Acree says “strong demand, lean inventories, and improving gross margin” lead to a positive outlook, and he’s maintaining his Buy recommendation. Acree’s disappointed by the forecast 6% rise in operating expenses this quarter, but he’s heartened by the upside in sales and believes AMD is making “significant progress toward break-even.” Acree is raising his sales estimate slightly for next year, to $7.98 billion from $7.88 billion, and thinks the company will have a 1-cent profit per share for the year, compared to a prior expectation of a 1-cent loss. He thinks the company deserves a 1.4x price to sales multiple, hence the $20 price target he’s placing on the stock.
- Caris & Co.’s Daniel Berenbaum writes Friday that the stock will find support given the strong quarter, but, “Continued cash burn coupled with a high debt load and declining book value drive our structurally negative view of AMD.” He thinks AMD will have to do some more financing with its cash, and that will cause dilution. That said, Berenbaum concedes AMD gained share in microprocessors against Intel for the second quarter in a row in Q3. And he does believe AMD will improve its gross profit further, perhaps as high as 51% of sales by the first quarter of 2009. His estimates for profit, however, are going way down, with a loss of 32 cents per share for the current quarter and 90 cents per share next calendar year.
- Thomas Weisel’s Kevin Cassidy is cautious until hearing more about how AMD is going to off-load the expense of chip making on outside contractors, a move that’s known as “asset lite.” “[M]anagement has yet to disclose details regarding its Asset Lite strategy, which we view as a potential catalyst to shares,” writes Cassidy in a note Friday. Cassidy has lowered his profit expectation for 2008 — or deepened his loss expectation, depending on your point of view: he now sees AMD losing $1.70 per share next year, up from his prior estimate of $1.00. Part of that comes from a reversal of a tax benefit to a 52-cent per quarter tax liability next year, he notes. Cassidy has a Market Weight rating on the stock and a 12-month price target of $15 based on 1.3x price-to-sales ratio based on calendar 2008 sales of $6.64 billion.
- Michael McConnell with Pacific Crest Securities is unimpressed with the rise in average selling prices that have cheered some others. “While blended processor ASPs rose an estimated 3% versus Q2, the sequential comparison was very easy, considering that ASPs declined 27% sequentially in Q2,” he writes Friday. He says the 6% projected rise in operating expenses in this quarter is proof of “weak cost controls,” and he’s not happy with the current pace at which AMD is rolling out new chips: “We remain cautious on the shares, given the delayed launch of the Phenom desktop processor, disappointing Barcelona server processor performance tests and strong likelihood for further share losses to Intel and Nvidia (NVDA) in 2008.”