Here is what some of the analysts are saying. No one wants it to die though it is crippled to the point that it has no effect on Intel, in my opinion.
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AMD Rising: Bulls Defend the Strategy, Bernstein Says Press the Short
By Tiernan Ray
Shares of Advanced Micro Devices (AMD) are up 9 cents, or 3.6%, at $2.73, bouncing back from losses in the late session last night, after the company missed expectations for its Q3 report and its Q4 outlook.
The company said it did okay in newer areas such as custom-made chips for game consoles. But it clearly struggled in the quarter in the PC microprocessor and graphics chips businesses, especially after a strong PC report from Intel (INTC) two days before. Analysts suggested AMD continues to lose share in graphics at the hands of Nvidia (NVDA).
On the conference call following the report, Su said the custom business had gained new customers in areas such as switching, and that new servers will incorporate its wares. She said the company made progress signing up laptop makers such as Lenovo for AMD’s chips, but the desktop processor business was affected by a buildup of inventory among distributors:
Our Enterprise, Embedded, and Semi-Custom segment delivered sequential and year-over-year revenue in operating profit improvement. We had strong embedded processor revenue growth and secured multiple new design wins across our priority markets. For instance, Arista Networks (ANET), a leader in software-driven cloud networking, began ramping production of new switches powered by our embedded G-Series SoC.
The report was effectively the second shoe dropping, after the company announced last week the its CEO Rory Read would hand the baton to Lisa Su, its COO.
As many expected, the announcement presaged a disappointing report. Along with the numbers, AMD said it will cut as much as 7% of the workforce, and sell some real estate, to shave $85 million off of operating expenses next year.
Raymond James‘s Hans Mosesmann reiterates an Outperform rating, and cuts his price target to $3.30 from $5, writing that this was “another reset, which explains the recent change in the CEO slot.”
Things will get “painful,” he thinks, but AMD is still a “valuable asset”:
Phase three of the company’s transformation will likely involve painful cuts in terms of layoffs (7% of headcount) and technology investment. We believe Rory Read’s strategy was correct in terms of shifting the focus to Embedded and Semi-Custom; it’s just that in the traditional CPU and GPU markets, Intel and NVIDIA had other things in mind. The Street will take time to determine if Lisa Su is the real deal or not. We believe this reset effectively clears the decks, with revenue likely finding a bottom in early 2015 as recent investment in new growth areas begins to take hold. In the meantime, we believe viewing AMD as a desirable asset is the right way to go in an environment of consolidation.
JoAnne Feeney with ABR Investment Strategy writes that she was disappointed by the results, but that she continues to believe in the company’s strategy. She recommends investors take advantage of selling, as she thinks the shares can work back toward $4 in 2016:
If the cuts leave intact AMD’s ability to move forward its roadmap for APUs, GPUs and semi-custom/embedded solutions, investors should be relieved. Cuts instituted this quarter would be enough to permit AMD to hold profits at current levels in 2015 and expand profitability in 2016. The risk, of course, is that AMD loses the ability to develop the very chips it needs to secure its future revenue generation. Our understanding is that AMD still had multiple layers of staffing which left room for greater efficiencies—the combination of GPU and CPU divisions eliminates some managerial overlap, for example. New CEO Lisa Su is coming out with a solid plan that leaves AMD in a position to reward those it retains (we are modeling Q/Q increases in OpEx through 2015); we expect that her deep knowledge will allow for selective retention that will position AMD to restore its CPU and GPU roadmaps (already underway) and to devote greater resources to semi-custom SoC design. The company also announced that it has secured two more semi-custom wins (revenues to begin in 2016) and, while these are relatively small programs (a combined $1B in sales over 3 years), they do point to further progress in diversifying revenue sources and to the value of customization in computational and graphics processing.
MKM Partners‘s Ian Ing, reiterating a Neutral rating, and a $3.75 price target, writes that he continues “to wait not he sidelines,” given “While there is a plan in place to stabilize, specifics felt light on the call and 2015 appears to be a dry spell for new sources of revenue (wait until 2016 for revenue from 2 new semi-custom wins).”
The strategy for the custom chips business was vague, he writes:
While we like the high-level commentary on this segment (that it remains a very important segment, represents an evolving area of the company and that they have started to invest a substantial amount of work to transform and strengthen the business), we felt that it was lacking in details as to the new ways they were going to approach it. While they listed some previously announced initiatives and reaffirmed their commitment to them, we think that a bold new road map would be more reassuring to investors, given such a severe guide in the face of its seasonally strongest quarter. However, we feel that the new CEO is a great candidate to tackle this challenge, and look forward to her plan to reinvigorate this challenged segment.
Stacy Rasgon with Bernstein Research reiterates an Underperform rating, and cuts his price target to $2 from $3, writing that results were ”hugely below consensus, and as bad as Q3 was, Q4 was worse.”
With the company reaching a “tipping point” for its finances, he urges pressing the short sale:
While (through what we believe to be a generous model) we do not have the company burning substantial amounts of cash (yet), AMD is now at a tipping point1 – they have pulled all their levers (opex cuts, refinancing, real-estate consolidation, etc), and it will take very little to push the model over the edge (the debt markets have recently taken notice as well, with the company’s CDS spreads spiking over the last week or two). We keep wondering when it will be time to cover this short. Now would not seem to be that time.
