A Chipmaker Investors Should Stay Away From

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

In the stock market, investors should be aware of any large price swings. We all know that it would be very irrational for a business, which was worth $1 yesterday, to be worth only 50 cents or $2 today. We should not be influenced by it. Instead, we should consider it as an opportunity and take full advantage.

What happened?

Chipmaker Advanced Micro Devices (NYSE: AMD) plunged nearly 14.4% to $2.74 per share yesterday. Investors showed their pessimism toward the company after it said that sales in the latest quarter were far below its forecast. Sales were expected to decrease by 10% from the previous quarter, much worse than an earlier prediction of 1%, plus or minus 3%. AMD declared that the demand for its chips is weaker than expected in all of the company’s product lines. In addition, because of $100 million inventory write-down, third quarter gross margin would be around 31%, much less than the previous expectation of 44%.

Indeed, 2012 was a awful year for the company and its shareholders. Since March 2012, its stock price kept losing value, from $8.25 to $2.74, a loss of 66.8%. 

<img src="/media/images/user_14219/screen-shot-2012-10-13-at-100059-am_large.png" />

More bad news coming 

The recent rumor is that AMD will be likely to announce a huge job reduction plan next week. 20-30% of its employees (2300-3500 jobs) might be out, including human resources in key areas such as engineering and sales.

As AMD’s financial condition for recent quarter was weaker than expected, S&P stated that it expected the company’s leverage ratio to rise above the threshold for the rating of 3x, and the cash position might deteriorate. As a result, S&P placed its “BB-“corporate rating on watch with negative implications. It means the AMD’s debt rating might be cut in the near future if their financial performance doesn’t improve.

Indeed, AMD carries a lot of debt on its balance sheet. As of June 2012, its stockholder’s equity was only $1.12 billion in total assets of $5 billion. It has nearly $1.6 billion in cash, but more than $2 billion in total capital leases. 

Gloomy PC industry

As more people switch to tablets and smartphones, the global PC industry took a decline in demand. According to IDC, the sales of PCs in July-September were 87.8 million, 8.6% lower than the same period last year. 

<img src="/media/images/user_14219/screen-shot-2012-10-13-at-115440-am_large.png" />
Industry peers

With gloomy PC industry outlook, four main semiconductor suppliers, Intel (NASDAQ: INTC), Broadcom (NASDAQ: BRCM), NVIDIA (NASDAQ: NVDA) and AMD took an indirect hit on their stock prices.

<img src="/media/images/user_14219/screen-shot-2012-10-13-at-121214-pm_1_large.png" />

From the chart, we can see that AMD’s stock experienced the worst decline since April 2012. In a one-year period, it plunged 45% whereas Intel’s stock declined only 8.3%.

Indeed, AMD’s operating performance has been the worst among the four.

<table> <tbody> <tr> <td> <p>%</p> </td> <td> <p><strong>AMD</strong></p> </td> <td> <p><strong>INTC</strong></p> </td> <td> <p><strong>BRCM</strong></p> </td> <td> <p><strong>NVDA</strong></p> </td> </tr> <tr> <td> <p><strong>Operating margin</strong></p> </td> <td> <p>-4.61</p> </td> <td> <p>31.22</p> </td> <td> <p>9.93</p> </td> <td> <p>13.33</p> </td> </tr> <tr> <td> <p><strong>Net margin</strong></p> </td> <td> <p>-9.92</p> </td> <td> <p>22.73</p> </td> <td> <p>10.19</p> </td> <td> <p>11.88</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>96</p> </td> <td> <p>15</p> </td> <td> <p>18</p> </td> <td> <p>1</p> </td> </tr> </tbody> </table>

What is worse? AMD is producing losses, whereas Intel, Broadcom and NVIDA all have positive operating margin and net margin. Furthermore, AMD is relying on too much debt compared to its peers. Its Debt/Equity (96%) is more than 6 times of Intel (15%) and nearly 100 times of NVDA (1%).

My Foolish take

AMD is facing a lot of challenges, not only weak overall industry environment, but also the operating performance itself. Personally, I would rather stay away from AMD, as I haven’t seen any positive signs of improvement in either micro or macro level. 

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hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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