How Bad Is It for AMD?

Here's how bad it is for Advanced Micro Devices (NYSE: AMD  ) :

Metric

AMD

CAPS Stars (5 Max)

**

Total Ratings

1,583

Bullish Ratings

1,278

Bull Ratio

80.7%

Bearish Ratings

305

Bear Ratio

19.3%

Bullish Pitches

356

Bearish Pitches

64

Data current as of April 10, 2007

Don't underestimate that 19.3% bear ratio. The professional and amateur investors participating in our Motley Fools CAPS investor intelligence database are predisposed towards bullishness.

But not the CAPS All-Stars. Stock pickers whose portfolios outrank 80% of the nearly 26,000 in the CAPS community see AMD differently. More than 30% of them predict a further slide in the shares of the upstart chipmaker.

A light revenue report for the first quarter suggests they're right. AMD cut Q1 guidance for the second time, to $1.23 billion, from its original forecast of $1.6 to $1.7 billion. Management, which promised cost-cutting and an operational restructuring, said that lower volume and selling prices contributed to the shortfall. Meanwhile, The Wall Street Journal added that AMD failed to deliver sufficient volume to its distributors.

Some will point to the report as proof that Intel (Nasdaq: INTC  ) is once again on top, and will remain there till it suffers an operational stumble. That may very well be, according to In-Stat chip analyst Jim McGregor, who responded to my request for comment with a lengthy email. Here's the most telling excerpt:

Is AMD really on the ropes? Yes and no. AMD still has a strong product strategy and roadmap for servers, which is where most of their most recent innovation has emerged from. AMD does not, however, have the edge they once had. Intel has taken the innovation lead in the volume applications in PCs, and is getting very aggressive across the board. The only good note for AMD on the Intel front is that Intel is still struggling with all the changes over the past two years.

I agree, and I'll go one further: AMD won't improve till it gets paid for its innovations. Have a look at how margins have declined over the trailing four quarters:

Metric

Q4 2006

Q3 2006

Q2 2006

Q1 2006

Gross Margin

38.0%

51.5%

56.9%

58.6%

EBIDTA Margin

(1.4%)

10.9%

10.0%

20.2%

Net Margin

(32.4%)

10.1%

7.3%

13.9%

Source: Capital IQ, a division of Standard & Poor's

Talk about a freefall. To be fair, McGregor points out that AMD hasn't introduced any major innovations over the past 12 months. Almost everything rides on the forthcoming quad-core Barcelona server processor, which is scheduled to ship during the third quarter.

Will Barcelona deliver? That's debatable, although I think it's safe to say most computer makers, including server market leaders Hewlett-Packard (NYSE: HPQ  ) and IBM (NYSE: IBM  ) , will give the chip an enthusiastic look.

But adoption is only one part of the equation. For AMD to recover as investors hope, Barcelona must restore the pricing power that's been a casualty of a war of attrition with Intel. Without it, this stock appears poised to suffer yet another unhappy ending.

Boot up with related Foolishness:

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Fool contributor Tim Beyers, who is ranked 620 out of more than 25,800 in CAPS, owned shares of IBM at the time of publication. All of Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy approved this message.


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