AMD Skids Amid Lower Forecast

The computer chip maker warned that fourth-quarter sales and earnings will fall short of estimates

Advanced Micro Devices (AMD) CEO Hector Ruiz has been vying for Intel's (INTC) customers for years. As the two computer chip makers have continued their war, they've had to notch down their prices. Late on Jan. 11, Ruiz announced disappointing sales during the three month period ended Dec. 31, explaining that his profits took a hit even as his unit sales gained. After the news, AMD's stock tumbled almost 12% on Jan. 12.

Ruiz expects AMD's revenue to rise to around $1.3 billion, roughly 3% more than that reported in the previous quarter and 29% less than the same period last year, according to a press release. Ruiz also says operating income during the fourth quarter, excluding one-time items, will be in the green but "substantially lower" than in the previous quarter. The mean analyst estimate for December-quarter revenue had been $1.84 billion, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

Ruiz has been going full throttle at his rival. In May, for example, he put up digital billboards that tally what AMD says is the amount of money spent on electricity bills by companies running Intel-based servers. AMD processors have been using less power than Intel's, according to Nathan Brookwood, head of market research outfit Insight64. But Intel's CEO Paul Otellini promised improvements in power consumption in April (see BusinessWeek.com, 5/3/06, "AMD Sticks It to Intel - Again").

AMD also completed its $5.4 billion acquisition of ATI Technologies in late October. The deal aimed to combine AMD's microprocessors business with ATI's in graphics, chipsets and consumer electronics. AMD has also talked about a new class of microprocessors and catering more to consumer electronics, according to news reports.

AMD's lowered forecast prompted a few downgrades from Wall Street. Citigroup lowered its opinion on the stock to hold from buy, Prudential went to underweight from neutral, and Bear Stearns cut the stock to peer perform from outperform.

Bear Stearns analyst Gurinder Kalra said in a research note that AMD's fourth-quarter warning was "very disappointing." The analyst thinks weakness came from its server business -- the "crown jewel" of AMD (server chips are the company's highest-margin products). Kalra believes AMD combated the competitive threat from Intel with significant price reductions to protect its market share. And the analyst expects further price reductions in its servers business during the first half of 2007.

However, one analyst sees some light at the end of the tunnel for AMD. "Although we see competitive pricing hurting margins until AMD produces chips on smaller nodes, we think new offerings later this year may aid longer-term profitability," Standard & Poor's Equity Research analyst Clyde Montevirgen said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies). Montevirgen kept a hold recommendation on the stock, but lowered forecasts on AMD's near-term growth, bringing a 12-month target price on the stock down by $4 to $24.