Investors Left To Suffer As AMD Cuts Guidance

| About: Advanced Micro (AMD)
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There is yet more bad news for investors of Advanced Micro Devices (NASDAQ:AMD), as the company cut its third quarter guidance. The smartphone/tablet evolution and its popularity with users are slowly eating away at PC sales. This quarter, PC demand slumped for the first time in more than 10 years. As we discussed in our previous update on AMD, the company relies on its PC products for revenue. In 2012, 74% of AMD's revenue came from the Computing Solutions segment, and 25% was driven by the Graphics segment. The anticipation of the Windows 8 has also considerably depressed earnings, as consumers are holding off their spending in order to buy W8 PCs. At a P/E of 9.4x, we believe the stock is correctly priced, and advise investors to hold the stock until a response to the Windows 8 is clear.


AMD pushed its stock price over the cliff by making major revisions to its Q3 revenue guidance. There was guidance for a QoQ reduction of 1% for the third quarter. The new guidance points to a reduction of as much as 10%. The company also said that it had witnessed a reduction in demand in all segments, due to a global macroeconomic slowdown. Inventory worth $100 million has also been written off in anticipation of lower demand in the future. This write-down had an adverse impact on gross margins, reducing them to 31% as compared to the previous expectations of 44%. Low demand forced AMD to further reduce the Average Selling Prices (ASPs) of its Computing Solutions Group products. The utilization rates of back-end manufacturing services were also squeezed due to lower demand. These are the primary factors behind the 13% gross margin reduction. On the bright side, operating expenses are expected to be reduced by 7% due to better efficiency and emphasis on cost control.

Earnings History:

AMD has a history of exceeding analyst expectations. In three of the last four quarters, it has beaten analyst estimates. Before the guidance revision, analysts were expecting the loss to be around $0.01 for third quarter EPS. Low estimates for the quarter were $-0.22 and high estimates were $0.05. According to our calculations, the guidance revision should have a net EPS impact of $-0.24. Therefore, investors should expect EPS for the third quarter to be around $-0.25.

Earnings History










EPS Actual










Surprise %





Source: Yahoo Finance

Windows 8:

We believe that the growth prospects in the PC industry are tied to the fate of the Windows 8. Microsoft (NASDAQ:MSFT) is set to release its brand new OS by the end of October. AMD's product portfolio mainly revolves around PC products, and the Windows 8 is crucial to AMD's long-term growth prospects. Any growth in PCs will not be available to AMD alone, as the market leader, Intel (NASDAQ:INTC), will be the first one in line to benefit.

Analyst Opinion:

If we look at the first cluster of bars, a steady decline in Strong buys is visible. On the other hand, the Holds have steadily increased in the last three months. This gives an indication of increasing bad sentiment among analysts about AMD's recovery. For the current month, from an opinion of 33 analysts, 20 have a hold recommendation, 7 say buy and six have a sell recommendation for AMD.

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AMD has slumped approximately 16% since the company announced its guidance revisions. The stock is currently trading at a forward P/E of 9.4x as compared to Intel's 10x. We believe the stock is correctly priced. The next major catalyst for AMD is the Windows 8 launch later this month. A favorable response to the Windows 8 can improve the EPS outlook for 2013. For the time being, we advise investors to HOLD until the Windows 8 is launched.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.