What an upside-down world we live in. Before the market opened today, chip maker Advanced Micro Devices
Knowing my long-standing support of AMD in good times and bad, you'd think I would be happy. But I'm frankly baffled by the shortsightedness of this market reaction, since I think it springs from the first bit of really bad news I've seen from AMD in a long time. I just saw one of my favorite investments weaken its long-term prospects.
I don't mind the weaker revenues in a seasonally slow quarter for semiconductor sellers. I'm not even worried about the company's report of lower unit volumes, though that does hurt a bit. AMD has recently been more of a high-volume, low-margin story, as its well-documented price war with Intel
But AMD is already accustomed to working on a tight budget and low margins. Further "operational efficiency" restructurings aren't likely to help much. Above all, management's plans rest on building out manufacturing capacity and out-innovating Intel in new processor designs -- both of which are much harder to do with a significantly reduced capital-expenditure budget.
Capex and R&D are the engines that drive this little train into the future. Cutting one or both can be a recipe for disaster, signaling a tacit repeal of market-share ambitions and long-term growth targets. Sure, it saves money in the short term, and the day traders out there love that sort of myopic focus. But it's absolutely the wrong track to take for an underdog locked in a mortal race with a much larger locomotive.
In all fairness, we only have about 100 words of explanation of all this so far, with more details to come in the earnings call next week. You can bet this Fool will listen in with keen ears, scanning for more detail on the cost-reduction plans. Go ahead and cut your costs, guys. Just remember to take that pound of flesh from somewhere you can spare it.
Further fully funded Foolishness:
- Is It Time to Buy AMD?
- The Best Tech Stock for 2007: AMD
- AMD Revisited
- Another Reason to Ignore AMD and Intel
Fool contributor Anders Bylund is an AMD shareholder, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure always makes sense.