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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