Monday, September 27, 2010

AMD Lowers Guidance, But Stock Price Rises ... Why?

On September 23, 2010, AMD, a maker of CPUs for servers and personal computers, made a big downward correction in its guidance [See AMD Update Third Quarter Outlook]. Yet the stock shot up from a base of $6.40 the next day, and since has risen to $7.02 at the close today. In the past few years, AMD stock has not done well on good news, much less bad news. What is the difference now?

Some pundits think Oracle may buy AMD. That makes no sense to me. Oracle may be in the market for a chip stock, but the idea would be to improve their datacenter hardware offerings, which are now based largely on Sun's old proprietary processors. AMD would bring a lot of baggage with it. The only attractive things about AMD would be its engineering teams, which are first-class, and its low price. Its market capitalization was just $4.73 billion end of today, and its non-GAAP P/E is 4.56, about as low as you can get.

Buying AMD would put Oracle in the desktop and notebook chip business, which are low-margin businesses. Oracle hates low margin business. They shut down a good part of Sun when they acquired it because margins were not high enough to please them. What Oracle needs is a smaller chip company with skills storage and networking chips as well as data processing. Marvell would be a good acquisition, but I doubt very much Marvell Technology would allow itself to be acquired. An even smaller company would make more sense.

Back to AMD, it is most likely that the stock price bounce had to do with short covering. Lots of people like to short AMD, which is the perennial loser in its competition with Intel. Intel had lowered its third quarter guidance weeks ago. In general the PC industry was known to be having a relatively slow Q3. I think the problem for the shorts was that AMD's problems were already built into the stock price. In fact, the new guidance could have been a lot worse. Then there are the Fusion products that will begin shipping in Q4 and ramp in Q1 2011. No short wants to be around to see what happens then.

When AMD's price rose after the announcements, the shorts had nowhere to go. They had to cover their bad bets. Momentum players jumped in too, taking advantage of the distress of the shorts.

AMD's new guidance is revenue for Q3 "in the range of down one to four percent as compared to revenue of $1.65 billion for the quarter ended June 26, 2010." What investors should be looking for when AMD actually reports Q3 numbers on October 14 is margins. Did they at least get good prices for the CPUs and GPUs they sold? After that, look at guidance for the release of Fusion APUs. All evidence is that they will be widely and happily adopted by OEMs that want to offer consumers better graphics capabilities than Intel can provide.

See also: Can AMD Ignite Fusion? [June 7, 2010]

AMD Q3 guidance given at Q2 analyst conference [July 15, 2010]

Note: I currently own AMD and Marvell stock, but not Intel or Oracle.

Keep diversified!

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