AMD Still Dwarfed by Intel

Shares of Advanced Micro Devices fall as initial excitement over its earnings report wanes.
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(AMD story updated with share price changes and analyst commentary)
NEW YORK (TheStreet) -- Advanced Micro Devices (AMD) - Get Report (AMD) stock has been falling after the company reported a rise in third-quarter earnings as initial excitement over it waned, the broader market appeared flat and other semiconductors only ticked moderately higher or lower in afternoon trading.

Shares of AMD fell 0.5% to $7.11 in afternoon trading while rival


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fell 0.4% to $19.24. Earlier, AMD shares had been trading higher in the Friday pre-market session and Thursday after-market session following the release of the report -- and as investors got excited about the possibility that semiconductor hardships had bottomed out and gotten pass a rough patch in the business cycle.

While many nodded at the company's solid third-quarter gross margin and lower operating expenses (despite the weak computing environment in the third quarter) and found solace in the company's ability to maintain profitablity through finance, manufacturing and operational restructuring -- a closer look at the reports generated concerns.

Such concerns included the company's flat fourth-quarter guidance, its weaker performance than Intel for the same quarter, its ability to follow through on new product execution, and its lag in technology next to Intel. Following the earnings report, Morgan Stanley analyst Mark Lipacis told clients in a note that "we have multiple concerns -- fourth-quarter guidance for flat quarter-on-quarter revenues was about 3 points below Intel's, AMD appears to have lost share in server again, GPU revenues declined by 11% quarter-on-quarter and the company expects the inventory correction to extend into the fourth quarter."

"We remain concerned about AMD's 80%-plus revenue exposure to" the consumer PC market, "and execution risks related to its Fusion products," he added. Meanwhile, Goldman Sachs analyst James Covello said, in a client note, that he expects AMD to continue to encounter challenges with its outsourced model because of the complexities of having separate design and manufacturing teams. "This has been evident in the 32nm transition delay."

Stifel Nicolaus analyst Kevin Cassidy said in a client note that AMD did well in the third quarter taking into account a sudden decline in demand and new product launches by rivals. "Returning an operating profit under these conditions is laudable."

Still, he does not recommend that investors jump into the stocks right now, given accelerating competition, the uncertain demand outlook and possible problems getting out new products. AMD has been underperforming the market and other semiconductors.

One of the more positive assessments of AMD came from Avian Securities. "AMD is being impacted by the same PC weakness as Intel, such as "weak consumer in developed markets, partially offset by better demand in emerging markets. At the same time, similar to its peer AMD is showing resilience in its margins which we view as a positive, partially compensating its smaller exposure" to enterprise and servers. "With that in mind, we remain positive on AMD as we think that risk-reward is still compelling with the potential for further room for margin expansion, supported by valuation that is well below historical mid-point," Avian Securities analyst Dunham Winoto said in an investor note.

AMD said third-quarter non-GAAP net income rose to $108 million, or 15 cents a share, from $2 million or break even on a per-share basis from the previous year. Revenue rose to $1.62 billion from $1.4 billion a year ago.

Analysts on average were expecting earnings of 6 cents a share on revenue of $1.61 billion. The company expects fourth-quarter revenue to be about flat sequentially for the fourth quarter.

During the quarter, revenue at the company's computing solutions unit rose 13% year-over-year, driven mainly by notebook microprocessor unit shipments, but was flat sequentially. The average selling price for microprocessors rose year-over-year, but fell slightly sequentially.

AMD's graphics unit revenue fell 11% sequentially during the third quarter, but increased 33% year-over-year. The sequential decrease was driven by decreased mobile graphics processor unit shipments (GPU) and decreased ASP (average selling price). The year-over-year increase was driven by an increase in GPU unit shipments and ASP.

-- Written by Andrea Tse in New York.

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