Semiconductor manufacturer Advanced Micro Devices (NASDAQ:AMD) has been trading on the cheap lately. It has the trappings of an appealing value play, but there's a lot more to AMD than meets the eye. Here are three reasons why it's probably best to stay away from this stock.
1. The PC's no longer the thing
As proven most recently when Dell (UNKNOWN:UNKNOWN) went private, personal computers have taken a backseat to the mobile phone and tablet. Even heavyweights like Microsoft and HP are taking a hit in computer sales, and for a company like AMD, which has put extra emphasis on building semiconductors for personal computers, this change in the wind could cause setbacks for some time to come.
AMD isn't the only company struggling with this. Its greatest rival, the much larger Intel (NASDAQ:INTC), has suffered its share of weaker-than-expected earnings calls lately. As fellow Fool Anders Bylund put it, the fact that both companies are struggling (as opposed to one triumphing over the other) is a sign that something has gone deeply awry in the world of IT.
2. A dismal past year
Besides a turn in the tech tide, Advanced Micro Devices has had to answer for some dreary recent financial statements. The company saw a 17% drop in revenue during 2012, along with operating and net income losses of more than $1 billion each.
AMD isn't just dwindling in sales. Its profit margins show that last year, the company was producing its goods inefficiently. During its most recent two quarters, AMD has additionally burned $239 million worth of cash. It's difficult enough for a company to adapt to changing trends if its business structure is stable. AMD's weak financial skeleton could make any change in the tech climate seem like a fatal blow.
3. Downgraded rating
Because of the business' recent financials, AMD was recently given a downgrade by the Fitch Ratings agency. Fitch based its assessment on a belief that the company's lack of cash flow would drive AMD to its "minimum operating level."
A low rating is probably the least of AMD's worries at the moment, but it can immediately affect its stock price, as it signifies the market is growing wise to its struggles. In this case, AMD's price dropped 2.6% to $2.67 after its downgrade. It's a small drop, but a drop nonetheless, and currently AMD isn't doing much to prove it can shake it off.
Save your money -- at least for now
If AMD can't adapt to its surroundings, it's going to get swallowed up. Now that the PC market is on its way down, AMD needs to spend less on producing its goods, or else its financials could get even worse, and the company could sink even faster. There are clearly holes in this boat, and investors may want to think twice before they step into it.