Foolish Forecast: AMD Investors Need Nerves of Steel

Bright and early in every earnings season, the high-tech platoon storms Wall Street. As always, Advanced Micro Devices (NYSE: AMD) reports third-quarter earnings just a couple of days behind larger rival Intel (Nasdaq: INTC), this time after the closing bell on Thursday.

What Fools say:
Nearly 2,000 Fools have rated AMD in CAPS, but an 80% approval rating only takes the company to a meek two-star rating. And it doesn't look like an endemic semiconductor loathing, either. Just take a look at how AMD's CAPS scoring rates against some of its peers and competitors:

	Market Cap (billions)	CAPS Rating	Bull Ratio
Intel	$150.4	***	89%
Texas Instruments (NYSE: TXN)	$50.4	****	92%
NVIDIA (Nasdaq: NVDA)	$20.0	*****	95%
Marvell (Nasdaq: MRVL)	$10.0	****	95%
AMD	$7.0	**	81%

Data taken from Motley Fool CAPS on 10/16/2007.

The bears have some strong arguments, too. One all-star player says that AMD "awoke a beast with VERY deep pockets, with very high margins." Another thumbs-down commenter thinks Intel has retaken the all-important performance crown for good, and still others see high hopes for the future, but nothing but pain in the short term.

The bulls mainly lean on valuation arguments, and SensationalSam sums up the situation neatly: "AMD investors are a finicky bunch: Snapping up stock at the hint of good news and dumping it as soon as Intel puts out a press release."

What management says:
Management isn't feeling too chatty right now. The latest guidance statement simply tells us to expect revenue to "increase in line with seasonality," presumably on a sequential basis. CFO Bob Rivet added some color, though: "We continue to focus on realigning our business model and reducing our capital expenditures and cost structure in the second half of the year."

Hmm. Hold that thought.

What management does:
OK, this hurts. AMD's financial performance is now worse than it was before the Athlon 64 started to kick glutes and take names in both the server and consumer markets two years ago. Intel's price war is squeezing AMD where it hurts, no doubt about it, and the company can't afford gross margins under 40% much longer.

If you want a bright side of sorts, try the revenue growth data. Yes, the swift growth of yesteryear hit a brick wall, but unit volumes are still increasing and at least the sales are staying close to the year-ago figures rather than dropping to the basement. I told you it wasn't much of an upper.

Margins	3/2006	7/2006	10/2006	12/2006	3/2007	6/2007
Gross	46.2%	49.9%	52.6%	50%	43.1%	38.9%
Operating	9.3%	11.2%	12.3%	7.6%	(5.7%)	(14.1%)
Net	6.2%	7.5%	8.8%	(2.9%)	(17.3%)	(28.9%)

Y-O-Y Growth	3/2006	7/2006	10/2006	12/2006	3/2007	6/2007
Revenue	19.3%	18.4%	8.4%	(3.4%)	(6.8%)	(3.3%)

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:
Let's get back to Mr. Rivet. The only really good news I saw in the last couple of earnings reports was the fact that AMD still managed to increase its research and development budget along with capital expenditures, quarter by quarter and despite the harsh environment. Heck, I even wrote poetry about that back in April.

To my ears, that was the optimistic and forward-looking drumbeat of progress. Go ahead and save money, but don't mortgage the company's future to get that done. So if Rivet was deathly serious and the capex line is in for a haircut, I reserve the right to be ticked off.

As always, the numbers will look bad again, but the real story is in the business outlook. Stop the margin hemorrhage, get some pricing power back, make your cuts in the right places, and spend, spend, spend on your future. Please.

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