3 Reasons Why the Market Doesn't Like Advanced Micro Devices, Inc.

On a previous article I said, one of the reasons why Advanced Micro Devices (NYSE: AMD  ) was trading at such a low price/sales ratio compared to Intel (NASDAQ: INTC  ) , was because AMD is a turnaround situation play and still has balance sheet issues.

Well, as of the most recent quarter, AMD's balance sheet issues are not getting better. Cash, cash equivalents and marketable securities totaled $948 million at the end of the quarter, down by $34 million sequentially. Inventory was $960 million -- up $91 million -- primarily driven by an increase of the the company's latest 28-nanometer microprocessor products and lower shipments to channel distributors.

Debt is an issue
Debt as of the end of the quarter was $2.2 billion, up by $72 million sequentially. AMD claims that this is due to "debt reprofiling activities". The company issued $500 million in 7% senior notes due in July 2024, utilizing the proceeds to buy back its 8 1/8% notes due in December 2017. The company expects to reduce interest expense by about  $3 million per quarter starting in Q3 2014.

However this might not be enough to calm investors. The main reason why the company can not make money is because of interest expense. Over the past 12 months the company has paid about $180 million in interest expense. Lowering this amount by just $3 million per quarter might not be enough to satisfy the market.In other words, deleveraging the balance sheet is not happening fast enough.

And just to give you an idea of how much more leveraged AMD is compared to Intel, please take note of the debt to equity ratio of AMD and Intel in the chart below.  


INTC Debt to Equity Ratio (Quarterly) Chart

INTC Debt to Equity Ratio (Quarterly) data by YCharts

Growth trajectory is off course
While the overall PC market has shown signs of improvement -- largely driven by commercial sales -- the consumer market remains under pressure. Contrary to Intel and Hewlett-Packard (NYSE: HPQ  ) , AMD mostly makes products for consumers and not the enterprise market.  The company's computing solutions business reported revenue of $699 million, a 20% decline compared to last year. AMD's CEO Rory Read expects the overall PC market to continue to be down by 5% to 7% for the year 2014.

In addition, if we read the most recent conference call transcipt, analysts seem to think that console sales will peak in the third quarter.And if that turns out to be the case, where is growth going to come from if consumer PC sales will remain sluggish and if console sales have peaked?

The company does have some very interesting products in the pipeline that might help it grow in the years ahead, however success is far from certain. Seattle, the industry's first 28-nanometer 64 bit ARM server processor, is on track to launch in the fourth quarter, however it remains to be seen if AMD will be able to take server market share from Intel. 

And while semi-custom SoC offerings have been the reason for the company's double digit growth over the past several quarters, if growth in the segment remains flat after the third quarter and beyond (as some analysts think is the case from the recent transcript), then AMD might be in a very difficult position.

Guidance was disappointing
The company now expects that third quarter revenue will increase 2% on a sequential basis, plus or minus 3%. This means that revenue will be in the range of  $1.42 billion to $1.51 billion. This is a very wide miss from the $1.57 billion the market was modeling. And the reason is simple; if growth stalls, balance sheet repair will not happen fast enough and the market will not undertake the risk of bidding up AMD shares, betting on a turnaround, before there are tangible signs that balance sheet repair is under way.

Bottom line
While one can also find positives in AMD's most recent quarterly report, the truth of the matter is that the number one priority -- balance sheet repair -- seems to be stalling. So until such time comes that the company is able to achieve double digit sequential quarterly growth (for an extended period of time in my opinion), chances are that balance sheet repair will not happen fast enough and the market will continue to be reluctant with AMD betting on a turnaround.

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  • Report this Comment On July 24, 2014, at 12:31 PM, chrispycrunch wrote:

    AMD is central to my portfolio and is why I'm still doing well, despite the recent drop.

  • Report this Comment On July 24, 2014, at 12:50 PM, stock123 wrote:

    very well said!

  • Report this Comment On August 04, 2014, at 1:02 PM, mtechac wrote:

    I think Intel is about to get hit by the 64-bit ARM products, and its only time before Intel will feel its punch.

    Intel was hit very hard by the 32-bit ARM on-slaught, and the 64-bit ARM processors will hit Intel in its most profitable areas.

    Intel having its stock at a 10 year high.. It never passed $30.00 in the last 10 years, makes it very vulnerable.

    On the other side, AMD lost huge portions of its business because it tool longer to finalize its HSA/hUMA/HQ architecture which Intel can't even try to design one because it lacks high-end GPU IP. Remembering that Intel failed miserably to build a high end GPU with the failed Larraabbee project.

    AMD will recover its market and then some, and having AMD stock price being at such a low bargain price, makes it a profitable stock no matter what, since they have now released their new architectures and Rory Read and other huge brains are making the right decisions.

    I am AMD long and will profit a lot from it. Their bussiness plans are solid and it has a great architecture and product coming in the next couple of years. AMD has great technology and opportunites and Intel can't touch AMD now. Meaning, Intel legally cannot pay AMD customers to not buy AMD products, which caused Intel to to pay billions of dollars to AMD and other companies..

  • Report this Comment On August 05, 2014, at 8:45 PM, rav55 wrote:

    The last few days of trading saw AMD close higher when the broader markets were closing lower. This contrarian is a demonstration that the market believes AMD was oversold at the last earnings announcement.

    Over the last week volumes have been very high and the while short positions have probably not declined in any appreciable amount, the short price entry points have certainly been raised to the +$4.00 level.

    A recent press release from Dell's Forrest Norrod where he tries to spread some FUD regarding ARM adoption made me laugh out loud.

    http://www.pcworld.com/article/2461180/processor-delays-hurt...

    Mr.Norrod is desperately trying to making the case that ARM silicon is not being adopted. Well that is quite true becasue ARM siliocn is currently being sampled and development kits are just now hitting the market: ALL ON SCHEDULE.

    While Dell is no longer publically traded the still need the high margins on Intel's big tin to survive and are probably not too enthused about the prospect of microservers replacing Xeon in some applications.

    Mr. Norrod erroneously states that Microservers are doomed to fail because they are not being released ahead of schedule.

    What Mr. Norrod and for that matter Intel fails to realise is the currnt energy consumption of big data is growing where if it is not checked, while account for close to 12% of the entire world wide consumption of fossil fuels!!!!!

    This is NOT acceptable. Not from the perspective of $ DOLLAR cost and especially not from the perspective of the ENVIRONMENTAL COST.

    Regardless of you political affiliation and your acceptance of global warming, THE ARCTIC IS MELTING.

    Currently Intel enjoys a 97% share in the grossly energy innefficient server market. That 97% has nowhere to go but DOWN.

    Broad acceptance of microservers is a foregone conclusion.

  • Report this Comment On August 07, 2014, at 8:36 AM, rav55 wrote:

    Well the Street may not like AMD but rumor has it Samsung just might.

    There is an acquisition rumor that Samsung is in talks to buy AMD. This could explain why AMD has been quietly climbing for the last few sessions.

    Here: http://bit.ly/V0r5Vp

    It also might explain why Samsung dropped there own in-house ARM server program.

    The Radeon brand plus ARM silicon as well as x86 license just might make AMD a very cheap take-over candidate.

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