<font color=darkred>Scott Herhold: AMD at last poised to end share price roller coaster
BY SCOTT HERHOLD
Mercury News
ADVANCED Micro Devices (AMD) is the stock that's broken a thousand hearts. For years, the pattern has gone this way: AMD announces a new product and the stock is bid up. The insiders sell and then it's discovered that there are manufacturing problems that will delay the new chip. As Intel Corp. (INTC) catches up, AMD's stock plunges and the brutal cycle begins once more.
Yet there are those who believe that this time is different, that this time, AMD CEO Jerry Sanders and his crew have finally solved their problems, that they've found the niche and manufacturing savvy to take on mighty Intel.
That's why the little drama that occurred last week was so interesting. At once, it showed the power of a huge customer, the fragility of faith among AMD's shareholders, and the short-lived results of an analyst's ride to the rescue.
The story begins July 19, when AMD delivered an encouraging second quarter report and announced a 2-for-1 stock split. Buoyed by sales of its microprocessor lines and its flash memory chips, the company reported revenue of $1.17 billion, nearly double what it was in the same period a year before. After taxes, its earnings per share were $1.21, up from 53 cents a year ago.
Having bid up AMD's stock on the expectation of good news, a sullen market reacted with a shrug and then a snarl. Selling to lock in their profits, investors began to drive the stock down from its high in the low 90s. By early last week -- July 31 -- it had lost nearly $20 to finish at $72.
That downward spiral accelerated the next day, Aug. 1, when an executive vice president for Cisco Systems Inc. (CSCO), AMD's largest customer for flash memory, appeared at the Opticon 2000 conference in Burlingame with what seemed like good news, at least for Cisco.
According to Bloomberg News, the Cisco veep, Carl Russo, reported that Cisco's supply of flash memory, a critical component in a range of products, had become more plentiful. ``We have seen dramatic improvement in the supply chain this quarter,'' he was quoted as saying.
To understand the impact of this statement on AMD, you have to know two things. First, an abundant supply of flash memory means a lower price for the chips, and thus lower profits for a supplier like AMD, which counts about a third of its revenue from selling flash memory. The second is that Cisco's voice in the valley rivals that of Alan Greenspan on Wall Street.
After the Tuesday speech, AMD's stock went down at an even faster pace, reaching a low of $62.50 at Wednesday's close. Investors who remembered the heartbreak of the past were heading for the exits.
That was when Sudeep Balain rode to the rescue. Balain, a technology analyst for Chase H&Q in San Francisco, has had AMD as a ``strong buy'' for a couple of months now. And Wednesday night, he began calling around to reporters and investors, suggesting that the market had misinterpreted Russo.
``We don't think the overall market for flash memory has improved any in the recent past,'' Balain said. ``Our understanding is that Cisco has gone back to AMD in the last three or four weeks, looking for more product. And AMD has obliged.''
The next day, a good day for technology stocks overall, AMD lifted out of its trough, climbing another $3 a share. But it gave back most of that Friday, finishing at $62.75.
Both Cisco and AMD have tried to clarify the Russo statement, pointing out that they continue to see a tight market overall for flash memory. ``Every flash memory unit we can make, we have a customer for through 2001,'' says John Greenagel, AMD's director of strategic communications. ``And prices are firm.''
Not everyone, however, agrees that the market is quite so tight. Dan Hutcheson, the president of VLSI Research Inc., a San Jose-based research firm, says flash memory prices peaked in June and have since receded, from $2.78 to $2.33 per megabit. ``For maybe two months, I've been saying the shortage is over,'' Hutcheson says.
By the same token, Hutcheson reports -- and most analysts agree -- that AMD's microprocessor sales are rolling along. With the addition of a new plant in Dresden, Germany, AMD has said that it plans to double the shipments of its seventh-generation processors -- the Athlon and Duron lines -- in each of the next two quarters.
So, the bottom line: Is this stock worth buying? At its current price, you can make a case for yes. Both its forward-looking price-earnings ratio (12 to 1) and its price-revenue ratio (a little more than 2 to 1) are attractive for its industry. Nonetheless, you've got to have plenty of Maalox on hand. The crucial test will be the old one: Can AMD produce its chips without manufacturing glitches?
There are some encouraging signs that this AMD is different from the old AMD. First, the gross margins -- how much the company makes on each sale above manufacturing costs -- has increased from 44 to 47 percent, a sign of increased efficiency. Second, AMD's debt has gone down. It recently agreed to repurchase a group of 11 percent notes, and it made use of cheap loans from the German government to build its Dresden plant.
But this is a stock with a history, a history that's never too far from the minds of its investors. That means that bad news -- or even a hint of bad news -- punishes AMD more seriously than its competitors.
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Scott Herhold's Stocks.comment appears Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail sherhold@sjmercury.com; phone (408) 920-5877. To read the columns online, see www.siliconvalley.com/ columns/stockscomment/
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