AMD Has Fallen and It Can't Get Up

Even after the Hammer debuts, it's not clear AMD can cope with the predictable and incessant price pressure issuing from Intel. Say Intel sells a $600 Xeon server chip that's technologically equivalent to a $400 Opteron chip, and AMD starts drawing customers away. Intel will have no compunctions about slashing its own price to $400 to compete, points out Adam Parker, an analyst at Sanford Bernstein.

He believes the Hammer's introduction is rife with potential for mistakes, betting the company will be able to add only about 1% in share next year based on the new products. "The Hammer, while ostensibly a competitive technology, is a bet on AMD's ability to execute both in manufacturing and marketing. Historically, they have not been particularly successful in those areas," Parker says. Sanford Bernstein doesn't do investment banking.

That's why AMD is a stock to trade, not a stock to own, he says. "If they start to gain a bit of share and the buzz around the Hammer launch is great, investors could probably make some money," he acknowledges. Bottom line, he says: "How much should you pay for a company whose normalized earnings are zero?"

In fact, over the long run, AMD's returns have been astonishingly meager. Over the past 20 years, the company spent $25 billion to reap a $2 billion increase in market capitalization, notes Parker. "They've destroyed $23 billion of value," he says.

Granted, AMD has promised investors that it's shaping up, sketching a plan to break even by the second quarter of next year. But the Street, unimpressed, doesn't expect the company to make money until the fourth quarter of 2004, according to earnings estimates posted on Thomson Financial/First Call.

The interim is destined to be painful, with AMD having just announced layoffs of 2,000 people, or 15% of its staff. The company said Monday that it will take restructuring and other special charges totaling between $563 million and $863 million after taxes. At a Lehman conference Monday, CEO Hector Ruiz acknowledged his company's loss of standing, asking the audience to "be open-minded about our prospects and our future."