Markets & Finance

Price War Leaves AMD Reeling


Shares of the chipmaker dropped to a 52-week low Wednesday as it swung to a loss in the fourth quarter

Investors gave a chilly reception to Advanced Micro Devices' (AMD) latest results on Jan. 24. The news comes less than two weeks after the No. 2 chip maker warned that its fourth-quarter results would miss its target, which knocked down the stock (see BusinessWeek.com, 1/12/07, "AMD Skids Amid Lower Forecast"). The main culprit: The continuing intense competition and price war with leader Intel (INTC).

AMD reported a fourth-quarter net loss of $574 million, or $1.08 per share, compared with earnings of $96 million, or 21 cents a share, a year earlier. These results include acquisition-related and integration charges with graphics chip maker ATI Technologies of $550 million, or $1.04 per share, and $27 million of employee stock-based compensation expense, or 5 cents per share. Revenue in the quarter rose 31% to $1.77 billion. But gross margins fell, to 40% from 52% in the third quarter, amid declines in average selling prices of its chips.

The company also issued an uninspiring forecast for the current quarter. According to the Associated Press, AMD's chairman and chief executive officer, Hector Ruiz, said on a conference call that AMD had underestimated pricing and competitive pressures, and that the company is focused on cost controls, a new design for its computer chips, and its transition to a more advanced manufacturing technology to better compete with Intel.

The news sent the stock down 8.6% to $16 in heavy trading on the New York Stock Exchange. Early in the session, the stock touched a 52-week low of $15.93. Meanwhile, shares of rival Intel rose 1.4% to $20.84.

A bunch of Wall Street analysts reacted by cutting their recommendations on AMD. "While we think most were expecting a disappointing report from AMD, the situation appears to be much worse than expected, particularly with respect to margins," wrote Friedman, Billings, Ramsey & Co. analyst Chris Caso in a note. "We do not agree with the premise that margin erosion has resulted from a "price war," but rather believe that AMD no longer enjoys the technical advantage it did last year, and is losing share in the higher margin segments of the market."

In his note entitled "Paradise Lost," Caso also said the drop in margins means the company no longer has the cash flow to support its aggressive capex plans, "creating a serious issue for 2007." He downgraded the stock to underperform from market perform, and slashed his price target from $17 to $10.

Credit Suisse analyst Michael Masdea downgraded AMD to underperform from neutral. Masdea said in a research note that AMD's fourth-quarter revenues of $1.77 billion were which in line with the consensus forecast, but much lower gross margin of 36.2% (on a GAAP basis), vs. his 48.4% estimate, drove fourth-quarter results lower than the Street's forecast. He noted that the company's first-quarter revenue forecast of $1.6-$1.7 billion is also lower than the consensus estimate of $1.82 billion.

Masdea said he thought AMD's impending enterprise market share gains in the desktop and mobile areas could offset the impact of its aggressive competitor. However, he noted that the assumption on AMD's market share gains is largely unchanged, but the aggressive pricing dynamic is nullifying the gains. He lowered his price target for the stock from $21 to $13.

Standard & Poor's equity analyst Clyde Montevirgen, who kept a hold recommendation on the stock, said in a note that AMD's profitability was hurt by lower pricing for chips and its lower margin ATI business. He lowered his $1.57 EPS estimate for 2007 to an operating loss of 13 cents per share, due to lower gross margins and the effect of the integration of its acquisition of ATI. Montevirgen also cut his target price by $5 to $19 on his reduced growth assumptions (S&P, like BusinessWeek.com is owned by the McGraw-Hill Companies (MHP).

McCormack is senior producer for BusinessWeek.com's Investing channel .

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