Advanced Micro Devices - Worth The Risks If Management Follows Up On Serious Cost Savings

Oct.15.12 | About: Advanced Micro (AMD)

Shares of Advanced Micro Devices (AMD) fell a whopping 14.4% on Friday. AMD reported very weak preliminary third quarter results before the market open. The results triggered a lot of rumors during the session about sizable job cuts at the firm, to be announced this week.

Preliminary Third Quarter Results

AMD now expects third quarter revenues to fall approximately 10% compared to second quarter revenues of $1.41 billion. Previously the company guided for a 1% drop in sequential revenues, plus or minus 3%. The company blames the poor results to weaker than expected demand across all product lines, caused by the challenging macro-economic environment.

Third quarter gross margins are expected to fall to 31%, from a previous anticipated 44%. The company will take a $100 million write-down in inventories due to lower than anticipated demand. Furthermore, lower average selling prices for the Computing Solutions Group's products and lower utilization of manufacturing facilities, impacts margins as well.

The company did manage to lower operating expenses by 7% as a result of tight cost control. The actual third quarter results will be published on Thursday October 18th, after the market close.

Valuation

AMD ended its second quarter of 2012 with $1.58 billion in cash, equivalents and marketable securities. The company operates with $2.02 billion in short and long term debt, for a modest net debt position of $440 million.

For the first six months of 2012, AMD generated revenues of $3.0 billion. The company net lost $553 million, or $0.75 per diluted share. Based on AMD's warnings, the company is on track to generate annual revenues of $5.5 billion for 2012. The company is likely to report losses approaching $1 billion for the full year.

Shares are valued at just $1.9 billion after Friday's fall. This values the firm at just 0.35 times annual revenues. Obviously, the firm is not paying any dividends, given its lack of operating profitability.

Investment Thesis

Year to date, shares of AMD have lost half of their value. Shares rose from $5 in January to highs around $8 in March. From that point in time it all went downhill. Falling revenues and a string of poor earnings guidances send shares to lows of $2.75 at this moment.

Over the past five years, shares of AMD have lost 80% of their value. Shares traded as lows as $2 during the financial crisis from highs of $40 as early as 2006. Shares recovered to $10 in 2010 and have fallen right back to $2-$3 lows again. Between 2008 and 2012, the company saw revenues stagnating. Revenues totaled $5.8 billion in 2008 and are likely to fall slightly to levels around $5.5 billion in 2012. The company reported a $3.1 billion loss in 2008, but managed to report profits in the years thereafter. In 2012, AMD is widely expected to report a large loss again.

While operating performance is dismal, the company did actually significantly improved its capital position. The company operates with a net debt position of almost $4 billion in 2008, and has cut this back to roughly $500 million at the moment. There are absolutely no signs of a short term recovery, on the contrary.

On the back of the preliminary warnings, rumors hit the market on Friday that AMD is looking to cut 10 to 20% of its 11,700 workforce in an attempt to cut costs. AMD might already announce the cuts when presenting its third quarter results the coming week. Demand for personal computers which carry AMD's chips is falling rapidly as many users switch to smartphones and tablets. Third quarter global PC shipments fell 8.3% to 87.5 million, according to market research firm Gartner.

Let's await this weeks official results and see which cost saving measures the company is taking. Shares are trading at very low levels as the operating environment for AMD is terrible. On the other hand, the financial position of AMD is relatively solid, as the company has liquidity available and the net debt position is relatively modest.

If the company announces serious job cuts, and gives any prospective for the short to medium term, shares might be worth the gamble.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.