For Advanced Micro, Things Go from Bad to Worse

Advanced Micro Devices (AMD) shares are taking yet another battering today in the wake of a fairly ugly Q2 earnings report. (see call transcript). While the Street appears generally supportive of the company’s decision to install Dirk Meyer as CEO to replace Hector Ruiz, and they apparently think the company is making a smart move in its decision to find buyers for its handheld and digital-TV chip segments, many analysts are skeptical that the company has easy fixes for its weak balance sheet and sliding market share. While a heroic few think the stock could be an appealing turnaround story, the consensus runs the other way: and in fact, would advise you to run the other way if you were considering jumping into the stock given today’s sell off.

• Goldman’s Jim Covello repeated his Sell rating and $3.50 price target on the stock. He is skeptical that AMD can meet its goal of hitting operating break-even in the second half. He notes that the company burned over $600 million in cash in the first half alone, and contends it will have to raise equity capital in the next few quarters, “which would be extremely dilutive.” He says the “cryptic” asset-light strategy the company continues to promise would actually be a negative for the business, “given the difficulties of optimizing design and manufacturing while working with several foundry partners.” And he notes that “AMD’s market share continues to deteriorate and it is having a difficult time closing the competitive gap” with Intel (INTC).
• J.P. Morgan’s Christopher Danely sounds a similar theme, asserting that “it will be difficult for AMD to make money unless it can gain back some market share and improving its pricing.” He stays Neutral on the stock.
• Bank of America’s Sumit Dhanda is a skeptic as well. “The path towards profitability is challenged, now that AMD is fighting multiple battles at the same time, including an aggressive competitive environment in graphics, lack of technology/cost leadership in client/server CPUs against Intel’s 45 nm products [and] share loss in notebooks,” and he says that “the potential encroachment of Atom into AMD’s turf [in] low end desktops and notebooks is likely to make matters even worse for AMD.” Adds Dhanda: “Meyer has his work cut out for him.”
• Citigroup’s Glen Yeung is another skeptic on the company’s break-even expectations; in his note this morning he pointed out that he isn’t modeling AMD reaching operating profitability in Q3, or Q4, or even Q1 of next year. He maintains a Hold rating, and cut his target to $6, from $7.50.
• Oppenheimer’s John Lau cut his target on the stock to $6 from $7. “AMD’s delayed product launches, vulnerable competitive position and low operating cash compel us to stay cautious,” he writes. “The difficult transition to 45-nanometer geometry and large net debt position compel us to maintains our Hold rating.”

There are a few lonely bulls left on the stock. Stifel Nicolaus analyst Cody Acree, for instance, says that “the bulk of the situation is the result of prior mistakes that are well on the road to being corrected.” And JMP Securities’ Krishna Shankar keeps an Outperform rating on the stock, which he calls “a value idea with positive catalysts,” like new products, the new CEO and a significant restructuring. But no one is listening to the bulls today.

Comments

[mkreisel]

AMD is a pathetic company.

[X86BSD]

I don't believe it to be a pathetic company. But a company with a pathetic board. I believe AMD *could* be another Apple story if the right people were put in place but I don't see that happening. These idiots took WAY to long to boot Ruiz who drove this company into the ground at mach 9. He has done everything he could to wreck this company. How does this tool keep getting a job??
AMD needs wayyyy better management and it needs to focus its too spread out and needs to start small again focusing on it's core model. Even then like Apple it will take a decade for it to be on decent footing again.

[X86BSD]

I don't believe it to be a pathetic company. But a company with a pathetic board. I believe AMD *could* be another Apple story if the right people were put in place but I don't see that happening. These idiots took WAY to long to boot Ruiz who drove this company into the ground at mach 9. He has done everything he could to wreck this company. How does this tool keep getting a job??
AMD needs wayyyy better management and it needs to focus its too spread out and needs to start small again focusing on it's core model. Even then like Apple it will take a decade for it to be on decent footing again.

[AMD observer]

Right on X86. I cracked up when you characterized Ruiz as a tool. He has an awesome track record of trashing businesses and, sadly, AMD is the latest vicitm. I am very hopeful now that he is out of the big chair. Meyer has a tough challenge in front of him, but with The Dissector out of the way he may actually have a shot at making something big out of AMD. One comment on the asset light strategy: I agree with the analysts who think this is a bad idea. The linkage between the design folks and the fab can be critical with regard to cycles of learning. If anything, AMD MUST be able to get new products to market quickly and having dedicated resources is key. I am particularly concerned about this in that one article I read had Hector running the new enterprise. <Shudder> I think it's the only way they could afford to get him out of the CEO seat. I am bullish on AMD. It will take a while, but I have seen this stock at $4.00 before and it has come back. The industry needs AMD as a foil to Intel and that will keep 'em running long enough to get it right now that the helm is in steadier hands.