SAN FRANCISCO -- This was supposed to be the quarter that Advanced Micro Devices ( AMD) got its act together. With the company's new quad-core microprocessors set to ship in volume, AMD was due to resume its siege on Intel's ( INTC) market share, shore up its profit margins, and even return its bottom line to break-even. To say that things didn't quite go as planned is an understatement.
Intel's Got a Secret About AMD
The company's fourth-quarter earnings report, due after Thursday's market close, will serve only as a reminder of how wrong everything went in the last three months of 2007. AMD long ago gave up any pretension of hitting break-even in the fourth quarter, dubbing its finance chief's prior comments to that effect a mere "aspirational goal." Analysts polled by Thomson Financial expect the chipmaker to lose 36 cents a share. But the brunt of the fourth-quarter fiasco stems from a bug in the new quad-core microprocessors that caused AMD to delay the general availability of its Barcelona server chip and the Phenom desktop PC chip. AMD's stock has sunk roughly 55% in the last three months, closing Wednesday at $6.57. Few expect AMD to emerge from its morass anytime soon. For AMD's management, the job is simply to demonstrate that conditions won't get any worse. Stifel Nicolaus analyst Cody Acree says AMD's stock is under pressure because of fears about the company's performance as well as the broader health of the PC market. "There may be investors that are interested at AMD at these levels, but who are trying to avoid the unknown. You really have to give those investors some excuse to take this level of risk," he says. One key to rebuilding investor confidence is the company's newly issued goal of hitting break-even (on an operating basis) by the end of the second quarter -- a goal AMD unveiled in December . So far, Wall Street has ignored that target, underscoring AMD's damaged credibility in the wake of its previous flip-flop on profitability. "If AMD can reaffirm its position on break-even, give details on how they plan to get there, it may not draw a dramatic amount of investors back in, but may help to stem the selling," says Acree, who has a buy rating on the stock. In the wake of Intel's lackluster fourth-quarter sales results, which brought no upside despite AMD's difficulties, there's a sense that AMD may at least be holding onto some market share in the low-end tier of the microprocessor business. Meanwhile, the graphics chips that AMD acquired with ATI (in a $5.4 billion deal AMD recently acknowledged having overpaid for ) appear to be experiencing decent demand. Analysts polled by Thomson Financial expect AMD to post flat sales year over year, with $1.78 billion in fourth-quarter revenue. Of course, AMD can't afford any more missteps, and management's update on fixing and shipping its quad-core chips will be scrutinized for any more signs of delays. More importantly, some observers believe AMD needs to make some fundamental changes if it hopes to ever get the business and the stock back on a growth trajectory. UBS analyst Uche Orji says that will require AMD to pare its costs and its ambitions. "We believe that AMD needs to streamline its strategy," says Orji, whose firm owns more than 1% of AMD shares. "They're stretching themselves too thin for the amount of resources they have," says Orji.