AMD Has Fallen and It Can't Get Up

Updated from 9:45 a.m. EST

Perpetual underdog AMD (AMD - Cramer's Take - Stockpickr) is getting precious little sympathy these days.

Reeling from a steep industry slowdown and price bullying from Intel (INTC - Cramer's Take - Stockpickr), the microprocessor outfit unveiled a plan to bolster its lagging business in early November. It's already winning some decent feedback on its new generation of Hammer chips to be introduced next year. Yet analysts remain leery of the stock.

The analysts point to continuing losses in market share, which will have worsened by the time the delayed Hammer chips hit the shelves, as well as the company's rich history of marketing and manufacturing missteps. Then there are the still-considerable balance sheet concerns. Before the layoff announcement, some analysts speculated the company had enough money to sustain it only for another four or five quarters.

AMD suffered another blow Tuesday morning, as shares skidded 11.6% to $5.76 after it announced plans for a $300 million convertible-bond offering. Following the announcement Standard & Poor's slashed its corporate credit rating on AMD to B- from B -- effectively deepening an existing junk rating -- while maintaining a negative outlook. The news adds to an emerging sense that AMD may not be able to regain the momentum it's lost in the chip downturn.

The offering itself didn't come as a huge shock, in light of the cash drain from AMD's continuing losses. Nor are the actual terms of the deal unreasonable. The size of the convertible bond offering isn't excessive for a company of AMD's size, and the resulting 37% debt to equity ratio is within reason, says Tom Smith, an equity analyst at Standard & Poor's.

But AMD's need for more capital merely reinforces pessimists' worries about its operating viability. "It's kind of an unusual story with a lot of potential and still a lot of fear about basic liquidity," says Smith.

Hammer, Don't Hurt 'Em

The question now is whether AMD can make headway with the Hammer line, particularly on the server front. Not only would that offer some much-needed growth in a more profitable market -- AMD draws most of its sales from lower-margin desktop chips -- but it would help bolster the company's greatly diminished credibility.

While a lot is riding on the Hammer line, the early read on the debut isn't encouraging. AMD took a hit last fall when it pushed back the introduction of the desktop processor by a quarter. Onlookers say consumers are likely to be skeptical of AMD's chips, because on clockspeed (a popular measure of performance) they fall behind Intel's products. Moreover, even if the Hammer doesn't suffer further delays, the company isn't likely to see tangible financial results from the new line until at least mid-2003.