Will The Tide Turn for AMD in 2013?

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Advanced Micro Devices (NYSE: AMD), one of the biggest stalwarts of the Microchip segment, continued its lackluster performance through 2012. While the NASDAQ Composite closed the year with about a 15 percent gain, AMD rang in a 55 percent loss in its value for 2012. While many of AMD’s woes stem from sector-wide weakness, slow economic growth and languishing PC demand, the stock even failed to perform as well as its closest competitor Intel (NASDAQ: INTC), which finished the year with a relatively milder loss of 15 percent. While AMD is going ahead with the introduction of new technology, would this year bring any respite to its investors?

Overall weakness in the PC segment is a well-documented fact now and does not need to be reiterated. While a large number of companies are affected by the slowdown in PC demand, many companies like AMD are exacerbating the malady through their internal inefficiencies. The company’s financial statements are enough proof of its declining fortunes, but an outfit’s morale gets a big jolt when it also start losing its talent. AMD lost about 30 of its senior executives last year. While a few of them were let go owing to the company’s reorganization process, most left AMD out of their own accord.  When top talent starts jumping the ship, you can rest assured that the company is in deep trouble and is not likely to perform well in the near future.

If we look past the Meta signals sent by its outgoing executives, we get to pay attention to an even more dismal financial condition of the company. AMD is trying to line its coffers by betting on its capital assets including its headquarter building. During 2012, it sold and leased it back to bolster its cash balance by about $150 million. AMD also renegotiated the deal with its wafer supplier, Global Foundries, in order to stem inventory build-up. While AMD will be buying a lower volume of wafers in 4Q2013 and FY2014, it will also pay a hefty $320 million in termination fees, which, given the current financial condition of the company, does not sound like a good idea. However, on the other hand, the company had to write down $100 million worth of its chip inventory in the third quarter of 2012.

Now, let’s have a look at the life force of AMD, its products. While the PC market is languishing, chip makers are diversifying themselves to gain a piece of the mobile computing segment. However, the company seems to be hell bent on committing hara-kiri as it proposes to cut down its work force to save some dough. A large part of this reduction is likely to be made in the engineering and R&D department, stifling the product development process. So, while it is all set to be beaten up savagely by Intel in the PC sector, it is unlikely to pose any major threat to smaller rivals like Qualcomm (NASDAQ: QCOM), Nvidia (NASDAQ: NVDA) or ARM Holdings (NASDAQ: ARMH) as well.

Its closest competitor Intel is far bigger in terms of market capitalization and financial strength. Intel is also known for its stress on R&D and the results are clearly visible as the company is now working on bolstering it 22 nanometer portfolio. AMD, on the other hand, is still focusing on 28nm. Its other peer Nvidia is also going ahead with Kepler technology and is likely to introduce new products in 2013. Nvidia’s Tegra 3 chip has also been well received by the tablet manufacturers.

So, is it all murky and gloomy for AMD? Let’s have a look at the company’s recent achievements. In the third quarter, it managed to lower its net loss figures. But the lower loss number was accompanied by corresponding lower revenue volume, negating the impact. Similarly, it also achieved a feat when it collaborated with Fujitsu for its 4G tablet Stylistic-Q572. The tablet comes with AMD Hondo chip. But again, the tablet itself failed to gain any traction, putting AMD’s future in further jeopardy.

In this quarter, AMD is likely to introduce its two new products Kabini and Temash in the first quarter of this year. It is expected to demo Temash at CES 2013 and it is also rumored that this APU may be featured in Microsoft Pro 2. Whether this rumored collaboration will be enough to bring the company back from the brink of death, is questionable, but it still provides a glimmer of hope. Surprisingly, Wall Street analysts are also holding out for the stock, despite all the negative sentiments shown by the punters in the stock market. AMD consistently shows high short interest, but at the very same time, 22 analysts have ‘Hold’ rating for the stock, in comparison to only 5 analysts with ‘Underperformer’ verdict.

Despite, analysts’ recommendations, it is difficult to make a case in favor of AMD. It is constantly hemorrhaging cash and the sales volume, along with sales price, is sliding. The company also seems rudderless as its top management seems to be unable to come up with a clear roadmap. Overall, AMD stock is destined to repeat its previous year’s dismal performance.

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