Foolish Forecast: AMD Is Stronger Than It Looks

Semiconductor underdog Advanced Micro Devices (NYSE: AMD  ) will report fourth-quarter earnings on Thursday night. The last few quarters have been disastrous, and AMD's share price has shrunk to microscopic levels. Is this where the proverbial rubber hits the road, or will long-suffering investors continue to suffer? Let's have a little chat about all of that.

What Fools say
Here's how AMD's CAPS rating stacks up against some of its peers and competitors:

Company

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

Intel (Nasdaq: INTC  )

$73.42

14.3

****

Texas Instruments (NYSE: TXN  )

$19.2

7.8

****

NVIDIA (Nasdaq: NVDA  )

$4.0

11.9

****

Sun Microsystems (Nasdaq: JAVA  )

$2.73

N/A

**

AMD

$1.26

N/A

**

Data taken from Motley Fool CAPS on 01/20/2009. Financial data courtesy of Yahoo! Finance.

CAPS member skymutt2 wrote the following in bearish volley in early December: "Burning thru cash, loads of debt, no end in sight for the losses." Ouch.

"This is a big one for a come back," says all-star member Vet67to82, who has an "outperform" rating on AMD. "Intel's only competition ... AND saving Intel from regulatory heat as a monopoly. Intel needs AMD to survive and prosper. ... Less price competition will be good for both companies bottom lines. Soooo, I'm looking for AMD to go from $2.00 to $10 to $20."

What management does
Small children and seniors with heart conditions shouldn't look too closely at the net income margin. It's scary stuff. But gross margins have come back to life despite the raging economic hurricane, and sales growth is healthy again. It ain't all bad news, amigo.

Margins

6/2007

9/2007

12/2007

3/2008

6/2008

9/2008

Gross

38.6%

36.4%

37.6%

40.2%

44.0%

46.7%

Operating

(12.8%)

(18.1%)

(20.4%)

(15.9%)

(11.6%)

(6.1%)

Net

(29.8%)

(37.4%)

(56.2%)

(49.3%)

(58.2%)

(52.2%)

FCF/Revenue

(39.4%)

(37.4%)

(33.2%)

(27.7%)

(16.6%)

(17.6%)

Growth (YOY)

6/2007

9/2007

12/2007

3/2008

6/2008

9/2008

Revenue

(6.3%)

2.3%

6.4%

16.4%

15.1%

14.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says
A fresh round of job cuts and salary reductions is bad tidings indeed, and we shouldn't expect this week's earnings report to impress anyone. Even mighty Intel is feeling the heat these days, putting a stop to a normally quite generous share buyback program in order to preserve cash.

So here's the good news: It won't get any worse. I think it's safe to assume that there won't be any expensive price wars this year, given Intel's cash-saving attitude. AMD's spin-out of its manufacturing operations should close in a matter of weeks, and the company's own balance sheet will breathe a lot easier after that. Saudi Arabian investors are picking up $1.2 billion of AMD's long-term debt and investing $3.6 billion directly into the as-yet unnamed foundry company. That's a healthy investment infusion into AMD's anemic arm, and it removes the burden of running an expensive high-tech semiconductor manufacturing operation.

The worst-case scenario I can think of is IBM (NYSE: IBM  ) swooping in like a masked raider to buy AMD wholesale for two or three times the current share price. Short of that, CAPS member Vet67to82's seemingly irrational exuberance seems spot-on to me. Let's just get over this last little bump in the road first.

Further Foolishness:

NVIDIA is a Motley Fool Stock Advisor pick. Intel is a Motley Fool Inside Value selection, and The Fool owns shares and covered calls of Intel. Try any of our Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund owns a few AMD shares, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


Read/Post Comments (2) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2009, at 10:50 AM, DC101010 wrote:

    It's really sad to see that moments after this article was published, Intel announced price cuts on all its processors. So much for no price war, it seems the writer of this article didn't understand the current semiconductor industry as well as he or she believed.

  • Report this Comment On February 12, 2009, at 1:55 AM, Zeth006 wrote:

    Correct me if I'm wrong, but isn't AMD mainly a CPU designer and manufacturer? AMD doesn't compete directly with Intel in the semiconductor market.

    Also, I think mailinator does have a valid point. Unless AMD and the Foundry are in some kind of long-term agreement not to try shafting one another on contract prices, there might not be a guarantee that AMD can cost effectively have another company make its chips for them.

    On the flipside, AMD became a private company owned by Saudi investors so that it wouldn't be affected by the tides of shareholder fears and whims. This gives it an advantage of being able to concentrate on its main goal of creating and patenting cutting edge CPU designs.

    We'll see how this works out in the longer run. I sure hope for the sake of us consumers we won't see any squabbles, though I admit I don't know everything about the joint venture.

Add your comment.

DocumentId: 813349, ~/Articles/ArticleHandler.aspx, 4/20/2014 8:07:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:00 PM
AMD $3.69 Down -0.07 -1.86%
Advanced Micro Dev… CAPS Rating: **
IBM $190.01 Down -6.39 -3.25%
International Busi… CAPS Rating: ****
INTC $27.04 Up +0.11 +0.41%
Intel CAPS Rating: ****
JAVA.DL $9.49 Down +0.00 +0.00%
Sun Microsystems,… CAPS Rating: **
NVDA $18.56 Up +0.07 +0.38%
Nvidia CAPS Rating: ****
TXN $45.83 Up +0.62 +1.37%
Texas Instruments,… CAPS Rating: ***

Advertisement