Goutama and thread, this article in spite of its title may give the stock a pop up tomorrow
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BUSINESS WEEK ONLINE
January 18, 2000
STREET WISE by Sam Jaffe
Wanna Bet That AMD Is Back -- Again?
The company that just won't die seems poised for yet another turnaround. But lots of investors aren't convinced
Any investor who has been around technology stocks long enough knows the story of Advanced Micro Devices (AMD). This semiconductor manufacturer always seems to be on the verge of a corporate turnaround that will forever put its history of broken promises and losses behind it. Yet something inevitably seems to happen to keep it from fulfilling its promise as the only legitimate competitor to Intel (INTC) and its marketing juggernaut.
Guess what? AMD looks promising again. It might just be another case of raised -- and soon to be dashed -- hopes. Or this one might be the real thing. To help predict the future, let's look at AMD's history.
Some 20 years ago, AMD had a 30% share of the central processing unit market just as the personal computer revolution was erupting. It gradually lost share to Intel as that company introduced each new iteration of its x86 line of microprocessors. Hope swelled with the promised introduction of AMD's K5 chip, which was supposed to beat Intel's Pentium to market. Instead, it sat on the design board longer than expected, leaving the Pentium to dominate the market.
OUT OF STOCK. Then it was the K6 that was to liberate AMD from its role as a second-tier player in the CPU field. This time, AMD beat Intel's Pentium II to market with its blazingly fast K6, and computer manufacturers filled its books with orders. Unfortunately, no one thought to prepare AMD's factories for that kind of demand. Soon, bottlenecks shut down production -- and AMD disappointed numerous customers and investors.
Now, AMD is in the process of rolling out production of the Athlon chip, which is competing with Intel's Pentium III. Again, AMD has produced what's supposed to be a technologically superior chip that's faster than Intel's. And again CEO Jerry Sanders is promising that production problems are a thing of the past. As a result, the stock has appreciated 52% in the past month, to 40 and change, as investors start to climb back on the AMD bandwagon. Are AMD's years in the wilderness finally over?
What has warmed shareholders' hearts is Sanders' notification to analysts in December that the company is on the verge of breaking even for 1999's fourth quarter. Those results will be announced on Jan. 19, and the consensus of analysts who follow the stock is that AMD will declare a one-cent per share loss for that quarter. Some, though, are more optimistic, saying the company will announce a profit for the first time in a year -- of as much as six cents per share.
BACK IN THE FOLD. Partially undergirding that optimism was Sanders' announcement that the company's flash memory sales, which make up about a third of its revenue stream, were higher than expected in December. Although AMD's main business is making CPUs for personal computers, it relies on its higher-growth flash business to prop up its overall gross margins.
Also contributing to the hopeful outlook is PC maker Gateway's (GTW) announcement that it would be making computers with AMD's Athlon chips. This is especially significant because a year ago Gateway pulled out as a buyer of AMD chips, saying it was fed up with production shortfalls. But Gateway returned to the fold because, it claimed, Intel had been slow in shipping Pentium III chips to its plants.
AMD wants investors to believe that this turnaround will be sustained. But it has a lot of persuading to do. AMD has missed so many quarterly earnings projections in the past that its credibility on Wall Street is about as deep as Fidel Castro's is in Miami. "For 15 years people have been expecting the next generation of chips to put AMD in a competitive position, but it hasn't happened yet," says James Barlage, who covers the company for Lehman Bros.
"WORLD-CLASS FABS." Dan Scovel, the semiconductor analyst at Fahnestock & Co., is convinced that AMD is about to enter its golden age, which is why he has a buy recommendation on the stock. "It's clear that the Athlon is the right chip at the right time," Scovel says.
Underlying his sanguine view of the company, Scovel says, is a close inspection of the manufacturing facilities that AMD now has. In addition to its Austin (Tex.) fabrication plant, the company has finally brought on line a major factory in Dresden, Germany. "They have two enormous world-class fabs that can rival anything that Intel can put out," Scovel says. He expects the plants to easily exceed the company's goal of 800,000 chips to be produced in 1999's last quarter. In fact, Scovel says, he expects to see a significantly higher production figure when the company reports its numbers on Jan. 19.
Not everyone is so enamored of AMD's prospects. Lehman's Barlage expects the fourth-quarter numbers to be spectacular, yet he's still neutral on the stock. "You look at their financials, and they are horrendous," Barlage says. In particular, he's worried about plant and equipment depreciation. Because it has had so many production problems in the past, many of AMD's factories have sat idle for hours at a time when they should have been cranking out chips that computer makers wanted to buy. Intel's plants, to the contrary, are almost always running at full capacity, which makes the huge capital expenditures needed to build a semiconductor factory worthwhile.
DWINDLING CASH. As a result of the massive depreciation caused by all that idle equipment, AMD's balance sheet and income statement don't look rosy. In fact, the company's cash hoard of $377 million has been nibbled at so often that it's disappearing. In the first nine months of 1999, AMD's cash position declined by $269 million, compared with a decline of $105 million in the first nine months of 1998.
If AMD has indeed turned the corner, none of that will matter. As long as its plants stay busy and demand stays strong, the company could enjoy several robust quarters. Its stock, which at $40.38 is much more expensive than it was just a month ago at $28.75, can still be had for a song. Analysts expect the company to earn 96 cents a share in 2000, which would give AMD a price-earnings ratio of 42. Not bad for a hot technology stock, especially if it manages to stay hot this time.
Jaffe writes about the markets for Business Week Online
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