Advanced Micro Devices (AMD) Plunges 11% After Weak Earnings

Shares of Advanced Micro Devices (AMD: Charts, News), the second largest CPU manufacturer in the world after Intel (INTC: Charts, News), plunged 11% after the company pre-announced its second quarter earnings.

(AMD: Charts, News) warned that revenue during the second quarter slid 11% to $1.41 billion, missing the average analyst forecast of $1.63 billion. This also missed (AMD: Charts, News)'s own forecast for 3% sales growth during the quarter, and is the company's worst showing since the fourth quarter of 2008, when its revenue plunged 35%.

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Unsurprisingly, (AMD: Charts, News) attributed its weak top line to a slowdown in China and Europe, as well as "a weak consumer buying environment" affecting its domestic business. Although it has yet to disclose its expected earnings per share, (AMD: Charts, News) ended the previous quarter deep in the red, posting a loss of $590 million. PC-related companies such as (AMD: Charts, News), Intel, Hewlett-Packard (HPQ: Charts, News) and Dell (DELL: Charts, News) have been hit particularly hard over the past year, as a torrent of smartphones and tablets have wreaked havoc on the Wintel market.
"The second-quarter miss isn't hugely surprising as poor PC data points have been pretty well telegraphed for nearly two months now," stated Evercore Partners analyst Patrick Wang. "The PC market seems to be limping along."
Although times are tough at (AMD: Charts, News), analysts don't expect its rival Intel to miss earnings estimates on July 17. Intel remains strong, with 73.5% of the market, while (AMD: Charts, News) clings to 26.5%. Six years ago, (AMD: Charts, News) nearly overtook Intel, with both companies claiming half of the CPU market. Since then, their paths have dramatically diverged.
Intel's upcoming release of its next generation processor, Ivy Bridge, is expected to exacerbate (AMD: Charts, News)'s woes and boost Intel's market share. Intel's Ivy Bridge CPU is the driving force behind a new generation of super-thin laptops known as "ultrabooks", which could shelter the company from increasing competition from Arm Holdings (ARMH: Charts, News) and Nvidia (NVDA: Charts, News) on the mobile front. (AMD: Charts, News) has no such product to defend against these next generation products, relying squarely on traditional laptops and desktops for the rest of the year. (AMD: Charts, News)'s graphic chips, inherited from its costly acquisition of (ATI: Charts, News), are also being squeezed by Nvidia's industry standard GPUs.
Intel's recent $4 billion acquisition to purchase 15% of Dutch chip-gear manufacturer AMSL Holdings, an investment to fund its research of next-generation chips, also threatens to push (AMD: Charts, News)'s aging technology into obscurity.
(AMD: Charts, News)'s last two quarters were heavily weighed down by heavy "one-time" charges. The company encountered manufacturing problems, which resulted in a restructured relationship with Globalfoundries Inc, which was spun off of (AMD: Charts, News)'s former manufacturing division. This spin off and restructuring was intended to allow (AMD: Charts, News) more freedom to explore other sources of revenue. Earlier this year, (AMD: Charts, News) attempted to increase its cloud computing presence by purchasing server technology company SeaMicro for $334 million. It also recently announced a new partnership with ARM Holdings to develop a special line of processors with an integrated Cortex-A5 processor, which will increase the overall security of its chips.
Despite current macro and micro headwinds, analysts believe that (AMD: Charts, News) will eventually return to profitability. The stock trades at 7 times forward earnings with a 5-year PEG ratio of 0.75, making it fundamentally cheaper than Intel, which has a forward P/E of 9.6 and a 5-year PEG ratio of 0.88. As long as Intel dominates the market, it's unlikely that (AMD: Charts, News), being its only true competitor, will go bankrupt, as long as customers need a viable discount alternative. The stock does not pay a dividend. (AMD: Charts, News)'s full earnings will be announced on July 19.

Other News About AMD
AMD Falls After Reporting Unexpected Quarterly Sales Drop AMD disappoints investors with a steep drop in revenue. AMD Licenses ARM Cortex-A5 to Boost Security of Its Future Chips Will a newly forged partnership with ARM lead to brighter days ahead? Other Stocks in the News
Google: Buy And Hold As Seeds Begin To Sprout Will investing in Google finally pay off? Why Intel Is A Buy Right Now Is Intel finally ready to break out?

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Published on Jul 12, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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