This Tech Stock Could Cripple Your Portfolio

Shareholders of Advanced Micro Devices (NYSE: AMD  ) suffered through their latest setback on Thursday as the company lowered its own third-quarter guidance from two months prior. AMD cited weaker-than-expected demand, specifically in notebook sales, and dropped its revenue guidance from $1.77 billion to a range of $1.58 billion to $1.64 billion.

Despite this, AMD has rallied off its recent lows on speculation that Oracle (Nasdaq: ORCL  ) might be looking to strengthen its presence in the semiconductor arena. Oracle made it clear recently that it would like to internalize chip production for its server business, which could potentially lower Oracle's expenses and increase its margins.

Oracle buying AMD might sound like a fairytale ending for AMD shareholders, but luckily this glass slipper doesn't fit. There are two reasons Oracle should avoid AMD -- and so should you.

Two Goliaths
First off, AMD simply doesn't have the pricing power to compete with the likes of Intel (Nasdaq: INTC  ) . Intel is larger, better capitalized, maintains more than 70% market share of chips in the desktop PC market (and more than 86% of mobile market), and they have a clearer vision of where PC sales are headed. The clearer the outlook for PC sales, the more pricing power Intel will have.

AMD, on the other hand, lacks a strong balance sheet, carrying $2.4 billion in long-term debt to only $1.9 billion in cash, and their lowered guidance stemmed largely from a cloudy near-term outlook in notebook and PC sales.

Apple (Nasdaq: AAPL  ) is the main culprit taking business away from AMD in the notebook market. Their top-down business approach of designing both the hardware and software in their devices has lowered costs, gives them a pricing advantage, and cuts companies like AMD out of the loop. Not to mention the fact that AMD doesn't have a competitive offering for devices like netbooks, tablets, and smartphones that require low-power processors.

It's the margins, stupid
Second, AMD lacks genuine growth in its gross margins. According to their most recent annual report, it took a gain related to an inventory writedown in 2008 for them to show a sequential gross margin increase. Notwithstanding this writedown, AMD gross margins fell from the prior year. It's not difficult to see now why AMD has lost money 10 of the past 12 quarters. If they don't do a better job of controlling expenses and inventory, they'll likely continue to lose money with regularity.

Some investors see value in AMD. If you ask me, all I see is a money pit.

What's your take on AMD? Let's hear about it in the comments section.

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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name UltraLong. Apple is a Motley Fool Stock Advisor recommendation. Intel is a Motley Fool Inside Value pick. The Fool owns shares of Apple, Intel, and Oracle. Motley Fool Options has recommended subscribers buy Intel calls. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (11)

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 October 01, 2010, at 12:28 PM, siri22 wrote:

    wrong!

  • Report this Comment On October 01, 2010, at 1:00 PM, whinebuster wrote:

    Oracle buying AMD might sound like a fairytale ending for AMD shareholders, but luckily this glass slipper doesn't fit.

    Lucky for who? I guess the answer is obvious. Sounds like wishfull thinking for a short.

    The news was last thursday, you are a week late. And how about why it was down from 7.65 to the recent lows? because some analyst said that chip sales where falling off a cliff and then AMD reported its sales would be down 1 to 4%, not exactly falling off a cliff. Then HP upped its this week. Maybe things are not as bad as you shortsighted shorts would try to have us believe.

    Oh yeah AMD lost money the last 10 out of 12 quarters, maybe you should mention it was the last 2 that it made money, maybe things are looking up?

    AMD has taken market share from Intel before... Intel responded by bribing large companies like Dell and threatening other small companies. Dont worry history will repeat itself. There are so many holes in your theories that you have to be an amateur.

  • Report this Comment On October 01, 2010, at 1:16 PM, mugwump67 wrote:

    I'm not interested in AMD right now, but it seems to me that if ORCL does buy them, their balance sheet will have little to do with it. If ORCL is looking for vertical integration, AMD's consumer business would be a secondary concern. I like their processors, but without ORCL or someone else buying them, they're in trouble--the Intel brand just has too much clout.

  • Report this Comment On October 01, 2010, at 1:32 PM, TMFUltraLong wrote:

    whinebuster,

    The problem I have is we've seen this circus act from AMD at least three times prior and it always ends in the same way - with AMD taking it on the chin and Intel walking away squeaky clean.

    AMD was extremely lucky to get 1.25B from Intel otherwise I'd have included how crippling their debt load was. Even now, 500M in net debt is nothing to sneeze at.

    They regularly sport some of the worst margins in the industry and that leads to a lot of quarterly losses. Face it, AMD is the Circuit City of semiconductors.

    And as stated above, I have no short position in any of the above mentioned companies.

    UltraLong

  • Report this Comment On October 01, 2010, at 2:02 PM, TEBuddy wrote:

    You are wrong. Just as Marech Fuches is always wrong about AMD. This company is priced at less than 5 times earnings. It has the most efficient server CPUs and GPUs. AMD is about to release this competitor to small devices that will blow the competition away. AMD, has suffered in the past from illegal actions from Intel. It is well documented. Intel was lucky that AMD was willing to settle, otherwise it should have been $10 billion they paid. AMD did not only get $1.25B though, they got royalty fee licensing, as well as a global eye on Intel for cheating. Since this happened, it is no coincidence that Dell, Lenovo, Apple, etc have recently moved to use some AMD products.

    You dont seem to account for their new partner and part ownership in Global Foundries. AMD can sell its 30% ownership when this company is the second largest chip manufacturer and they will have no debt. The amount of debt they have paid off and they have come through a recession becoming profitable, while others have gone bankrupt or lost value. They have nowhere to go but up and the global economy improves.

  • Report this Comment On October 01, 2010, at 2:33 PM, TMFUltraLong wrote:

    TEBuddy,

    The problem is that the global economy is always cyclical. As I stated above, AMD has a nasty habit of rolling around in its money when times are good, and rolling around in that same money as the sky is falling around them. Invariably the economy troughs and they are left with the worst margins of the bunch, short on cash and wondering what happened.

    Their Global Foundry partnership has a lot to be desired and I'm highly skeptical that they'd be able to use proceeds from that to pay off all of their massive debt pile.

    AMD just continues to show me every few years why it is the worst company in the sector.

    UltraLong

  • Report this Comment On October 01, 2010, at 3:02 PM, TEBuddy wrote:

    The worst company that has driven every technology leap in the last decade. The worst company that has made computing affordable to the entire world. The worst company that is partner in the what will be the worlds most advanced semiconductor company.

    That doesnt sound like such a bad company to be associated with going into the future. The proverbial underdog that refuses to give up. Part of investment is understanding a company's dedication to its business, and how devoted management is to their goals. Although much of the top management has changed, AMD has come through a global recession shining with Goliath moving to copy their next innovation once again.

    You are downplaying the economical terrorism Intel played on AMD. Intel is a ruthless competitor and you discount the ability they had to run AMD into the ground. Well no more, or there will be real consequences, not just $1B here and there in fines. AMD rose then fell, and its on the rise again, and Im pretty sure that is not enough data to call it a trend like you say.

  • Report this Comment On October 01, 2010, at 4:54 PM, renitentInv wrote:

    I'm going to say upfront that I have them in my CAPS portfolio, but at this point it is too uncertain to put any real money on it.

    Technically speaking, I am a strong supporter of the practices followed at AMD. They generally take the approach of making a global solution rather than fixing things on the fly like which is typical practice at INTC and NVDA. This can be seen greatly in driver coding if anyone here is familiar with this field.

    All that being said, AMD is the most difficult stock to defend. Unfortunately the companies that follow the best technical practices are not always the stocks that succeed.

    AAPL through most of 80's and 90's is a great example of this as well as many others.

    AMD seems to be in the precarious place of being a rocket that, may or may not, still have some leaky pipes. So your basically betting on the fact that the duct tape will hold long enough to make it to space.

    Wish their stock holders the best of luck, your braver than I am.

  • Report this Comment On October 01, 2010, at 9:21 PM, jefftan8866 wrote:

    I don't think Oracle will buy AMD based on the information from my source. So if you buy AMD stock because of the rumor that it will be taken over, you will be very dispointed since the rumor is not true and AMD stock has up about 25% from it's low largely because of the rumor. I don't want to coment on both AMD and Intel in terms of how they operate and their products because my personal position.

  • Report this Comment On October 01, 2010, at 10:22 PM, TEBuddy wrote:

    I agree that an Oracle acquisition of AMD is highly unlikely, I would not expect it. It was easy to predict ATIC investing in AMD and taking over the foundries. It is clear that AMD is not a company to be taken over, they have determination. Im sure everyone has their price, and you are looking at probably 5 times their stock price to purchase AMD. And it would not be an easy purchase, ATIC would probably move to purchase the whole company if an acquisition was emminent.

    What is clear is that AMD has new products about to release that provides them not only access to new markets, but a leg up in those markets on performance. Thier vision of the APU that started with the acquisition of ATI will shortly be realized.

    AMD should be climbing for more reasons that the value they hold as an attractive acquisition. Its not because of an Oracle acquisition rumor.

  • Report this Comment On October 04, 2010, at 7:09 AM, asH95 wrote:

    This is perfect example of all that incomplete information disseminated out there that damn near boarders on deception.

    Notebook trends ARE going south, true, however handhelds and small form factors are trending upwards. Whether this is reciprocal, I haven’t explored; this response is just a knee jerk reaction to a jerk article. Moving on- most are not aware that the CPU is facing a Paradigm shift in design that will be upon us towards the end of this year into the beginning of next year. CPUs will no longer exist the way we once knew- these new designs are ready for smaller form factors, delivering more powerful computing, with less power requirements, though not designed for Iphone, Ipod type (size ) devices, these new chips are more in line with netbook and tablets- AMD and Intel are addressing the upward trend of smaller form factors with their new chip designs.

    asH

  • Report this Comment On October 04, 2010, at 9:41 AM, Yonosemañana wrote:

    Hi all, I'm new to trading and I bought this (as my first) stock when it was at 5 mainly because I believe in their product. I went against all the articles and what people have told me. Since I got it I have made descent money with it.

  • Report this Comment On October 08, 2010, at 1:41 AM, TMFUltraLong wrote:

    Yonosemanana,

    Nothing wrong with making money, congratulations, but I definitely feel you could be putting your money in safer names with stronger balance sheets and track records.

    UltraLong

  • Report this Comment On October 11, 2010, at 4:42 PM, Yonosemañana wrote:

    Ultralong,

    Maybe you are right, maybe you are long. But I think than more than stronger balance sheets and track records is the product. I mean... look at Apple.

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