It's been a long, bumpy ride for AMD (AMD 2.33%) shareholders in 2012. Even after some much-needed relief the past week, AMD's share price is down over 58% year to date. It's not hard to explain AMD's downturn -- a declining PC market, a management team slow to adapt to an exploding mobile marketplace, and burning cash to pay for day-to-day operations is enough to scare the most avid of fans.
Explaining the rationale behind investors' recent exuberance takes a bit more doing. Sure, there are several newsworthy items AMD bulls have glommed onto, but do these really warrant this week's jump of 20% in share price? You be the judge.
Recent happenings at AMD
Whether you're an AMD bull or bear, the Dec. 3 announcement that AMD intends to sell and lease back its Texas campus is worth consideration. Bulls are quick to point out that when the deal closes, AMD will pocket an estimated $150 million to $200 million in much-needed cash. Plans are to complete the transaction, and have the proceeds available to help pay operating costs, by Q2 of 2013.
For AMD bulls, the Austin, Texas real estate deal demonstrates the depth of its financial woes. Clearly, AMD isn't in the commercial real estate biz, nor should it be, but selling assets as a stop-gap measure to pay overhead? That's disconcerting, to say the least.
Speaking of stop-gap measures, fellow Fool Evan Niu discusses another AMD share price driver this week in this recent article. The gist of Evan's article is that AMD investors are placated -- bullish, even -- by the knowledge that one of its primary shareholders, Mubadala Development, almost has to bail AMD out financially because of its 19% stake. Apparently, that's a good thing.
The $334 million deal to acquire SeaMicro, announced in early March of this year, is beginning to show signs of life. AMD announced its SeaMicro SM15000 is Citrix-ready, and was verified as such by Citrix. Whether the results of AMD's collaboration with SeaMicro become a game-changer, only time will tell. If nothing else, the SM15000 confirms AMD is leveraging its investment in SeaMicro, expanding beyond its reliance on the PC market, and further penetrating data centers.
Upgraded processors for use in cloud computing were also announced recently, reinforcing AMD's commitment to target growing markets, and adding fuel to its positive stock price movement of late.
And now, for some reality
As detailed in AMD's rather depressing Q3 earnings announcement, there are definitive plans to reduce overhead, including shaving $190 million in expenses, primarily through a 15% reduction in AMD's workforce. Drastic? Perhaps, but it needs to happen when operating cash flow is at a premium, as it is with AMD.
AMD's goal to break even on an operating cash flow basis, equal to $1.3 billion quarterly, is a key piece of its "business model." Makes sense, particularly as AMD carries over $2 billion in long-term debt. What's concerning about AMD's business model is the target date for breaking even on a cash flow basis -- it's this time next year. AMD needs an entire year of dramatic cuts and operational improvements to generate enough cash to even pay overhead? Is that a hole AMD's in -- or a grave?
Concentrating on growth markets – including cloud and mobile computing – is the right direction for AMD. Problem is, it's a crowded field, and everyone has a big head start. Qualcomm (QCOM 1.02%), Ericsson (ERIC +0.39%), and NVIDIA (NVDA 1.58%) began supplying mobile computing and smartphone manufacturers early on. Qualcomm and NVIDIA, in particular, are examples of the bucking the processor manufacturing trend of declining sales.
According to IHS, both Qualcomm and NVIDIA will grow processor revenues in 2012: Qualcomm by over 27%, NVIDIA by just under 9%. AMD? According to the IHS study, 2012 will show a 17.7% decline, thanks to the PC market. As for Ericsson, its smartphone patent portfolio alone makes it a force to be reckoned with. Just ask Samsung, the target of a recent patent infringement lawsuit filed by Ericsson.
Like AMD, Intel (INTC +1.14%) was also late to the cloud and mobile computing party, but still beat AMD to the punch on virtually every front. Including, cloud computing, servers, data centers, and most every other non PC-related market. For investors, a big difference between the longtime competitors is Intel's sound financial position, and its impressive 4.5% dividend.
There's a lot going on at AMD, including its recent jump in stock price. Unfortunately, there are still too many questions, and not enough answers.
