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You Need AMD in 2009

By Anders Bylund – Updated Apr 5, 2017 at 7:51PM

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Cost cuts show some much-needed discipline. This stock is going places.

It wasn't a happy December for 600 AMD (NYSE:AMD) employees. Instead of a Christmas bonus, they got a pink slip and a severance package. That's 100 more than the 500 cuts the company originally expected to make.

Don't cry for the unemployed, though: AMD expects to record $34 million in cash costs related to severance payments and continued benefits this quarter. That works out to some $57,000 per lopped-off head and a pretty soft landing in hard times. And 600 out of 16,420 staffers (as of December 2007) works out to about a 3.7% workforce reduction. That's fairly drastic, but still far short of the rumored 10% cutback brewing at Microsoft (NASDAQ:MSFT) or a similar-sized plan under way at Electronic Arts (NASDAQ:ERTS).

AMD's stepped-up layoffs may be bad news for employees, but they’re a good sign for investors. This shows that management has the intestinal fortitude to make tough moves when needed, as well as the opportunistic eye to ferret out cost savings in new places.

The company probably will fall far short of its projected guidance for the current quarter, especially since the layoffs and some new goodwill and investment writedowns laid a few extra stones on that burden. But the Shanghai chips are shipping in volume through big-name server vendors like Sun Microsystems (NASDAQ:JAVA) and IBM (NASDAQ:IBM). AMD's ATI graphics cards are currently beating arch-rival NVIDIA (NASDAQ:NVDA) in a number of performance measures, and next year, we'll see the first true fruits of the ATI acquisition with new lines of highly integrated system platforms.

All of this adds up to a strong position in each of AMD's core markets. It won't kill NVIDIA or Intel (NASDAQ:INTC) by a long shot, but all AMD really needs to do is to perform once again the way it did three or four years ago. The stock price spent a lot of time in the $20 range before Intel put price-war moves on its smaller rival; after that, it even briefly touched $40 per share. Today, AMD looks poised to return to profits, and to world-beating stock market performance to boot.

Worst-case scenario? Nope, I don't see a bankruptcy or liquidation, even if the long line of creditors come looking for early payoffs. Much more likely is an acquisition at a hefty premium to today's prices, probably at the hands of Big Blue or perhaps Sun. Win or lose, I believe AMD will still beat the market next year.

Further Foolishness:

Microsoft and Intel are Motley Fool Inside Value selections. NVIDIA and Electronic Arts are Motley Fool Stock Advisor recommendations. The Fool owns shares and covered calls of Intel.

Fool contributor Anders Bylund owns shares in AMD, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

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Stocks Mentioned

Advanced Micro Devices Stock Quote
Advanced Micro Devices
AMD
$74.19 (-1.26%) $0.95
Electronic Arts Stock Quote
Electronic Arts
EA
$128.62 (-0.68%) $0.88
Microsoft Stock Quote
Microsoft
MSFT
$242.55 (-2.00%) $-4.94
Intel Stock Quote
Intel
INTC
$28.90 (-1.50%) $0.44
Nvidia Stock Quote
Nvidia
NVDA
$160.97 (-1.06%) $-1.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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