We all knew it was coming, but it's still no fun when the numbers roll in. When AMD (NYSE:AMD) spent $5.4 billion in a combination of cash, stock, and fresh debt to acquire Canadian graphics expert ATI last fall, its earnings and margins were obviously bound to suffer. Some of the acquisition costs made it onto the income statement rather than the cash flow sheet, raising the hackles of bottom-line watchers everywhere.
A hefty $550 million of ATI-related integration costs, plus significantly lower gross margins as the AMD-Intel (NASDAQ:INTC) price war rages on, brought AMD a large net loss for the quarter, and a small one for the full year. The stock is trading nearly 7% lower today compared to yesterday's close. It's a new 52-week low, more than 60% below the highs set in March. The market as a whole clearly didn't like what the company had to show.
Is this a good time to panic and sell all your AMD stock? Of course not.
Fine, go ahead and sell if you're bound and determined to lock in your losses. If your nerves can't handle the occasional downturn, especially when it's based on widely expected news, you shouldn't be holding volatile tech stocks anyway. Grab a 30-day free trial of Income Investor or Champion Funds, where stable, predictable results are celebrated. I'm more of a Rule Breaker myself, with an eye for major growth opportunities, and I think that AMD's management has a similar outlook.
"We believe we once again gained microprocessor unit share in the quarter, as we did in the year, by continuing to execute against our customer acquisition strategy and our product, technology, and manufacturing plans," said CFO Robert Rivet in one especially long sentence. "We need to improve our financial performance relative to what we delivered in Q4. We will do so by delivering improved products, lowering our manufacturing costs, increasing our operating efficiencies across all disciplines, and continuing to grow share."
Remember that AMD has a long history of playing the underdog, nipping at Intel's sizable heels. Low margins and tough competition are nothing new here. The firm is content to sacrifice short-term results for a stronger market share. There's also a good-looking quad-core processor in the works, based on a new microarchitecture, and it has the potential to grab the performance crown back from Intel.
AMD says that the process of integrating ATI is "already largely behind us," and there should be no more large surprises on the income statement. When the likes of Motorola (NYSE:MOT) and Palm (NASDAQ:PALM) figure out how to sell high-end handsets again, ATI will be there to power their graphics. And instead of pulling the purse strings tight after splurging on ATI, AMD expects to spend $2.5 billion in capital expenditures this year, aiming to increase manufacturing capacity and upgrade aging production lines. "That will generate a negative cash flow," said AMD president Dirk Meyer, "but as you can see from the balance sheet, we're prepared for that."
AMD understands that long-term results matter more than short-term earnings management. That same sort of attitude made companies like Cisco (NASDAQ:CSCO), Nucor (NYSE:NUE), and Costco (NASDAQ:COST) the market-beating powerhouses they are today. It's also why I think AMD will come back in a few quarters and show us the beginnings of a brighter future. The price war is arguably more painful for Intel, because of its higher unit volume, and the combat can't go on forever. AMD management expects to improve gross margins even while the war rages on, and good things should follow. In time, AMD should stand shoulder-to-shoulder with giants like Intel and Cisco.
As always, Fools should do their own homework and make up their own minds. Still, I believe that my money is more than safe with AMD -- it's in downright good hands. I only wish I could get more of its shares at this bargain-basement price.
Further Foolishness:
Intel is a Motley Fool Inside Value selection, and Palm is a Stock Advisor pick. Try any of our Foolish newsletters free for 30 days.
Fool contributor Anders Bylund holds a position in AMD but in none of the other companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always exciting.
