AMD: Every Which Way but Lucid

A day after its earnings beat, investors -- and AMD itself -- can't get a read on the chipmaker.
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Advanced Micro Devices

(AMD) - Get Report

confounded the many skeptics who had already written its obituary when it delivered a

second-quarter revenue beat Thursday.

But getting a read on the fundamental narrative defining AMD has gotten no easier.

Whether AMD is a plucky David, outmaneuvering chip giant

Intel

(INTC) - Get Report

, or a Pyrrhus blinded by the devastating cost of victory, is something that investors -- and perhaps even AMD itself -- appear not to have figured out.

"Every time I think that Intel is going to put them out of business,

AMD's stock comes back," says Pat Adams, the chief investment officer of Choice Funds. Adams is long Intel and short AMD, but says the position is more a reflection of current market sentiment than anything else.

AMD's shares initially rallied more than 5% in extended trading after the second-quarter earnings report, but were off 20 cents at $15.58 in midday trading Friday, in a down day for the stock market.

AMD claimed that it won unit share and revenue share in the second quarter. And although the numbers from outside analysts are not in yet, AMD's claim seems credible enough given the 38% surge in microprocessor shipments that it achieved during the quarter.

Of course, that didn't help AMD's bottom line, which recorded a whopping $600 million net loss, or $1.09 a share.

Even excluding hefty acquisition-related charges, AMD had a $332 million operating loss. That comes on the heels of a $363 million operating loss, also excluding special charges, in the previous quarter.

Clearly, that's not sustainable for any company, let alone one on such shaky financial footing as AMD.

Deutsche Bank's Ross Seymore points to further deterioration on the balance sheet. Backing out $1.5 billion in proceeds from the recent convertible bond offering, AMD's cash declined by almost $1 billion, Ross wrote in a note to investors Friday.

Ross estimates that AMD's cash flow from operations during the quarter was negative $700 million and free cash flow was negative $1.1 billion.

Deutsche Bank makes a market in AMD shares, has managed an offering for the company in the past year and has provided it with investment banking and noninvestment banking services.

Focused on Profit

AMD executives said the company is moving forward with a "maniacal" focus on profitability. But executives also asserted that AMD's goal is to gain unit and revenue market share every quarter.

To date, those two objectives have been at odds, as market share gains have been synonymous with the deep price cuts that have eroded AMD's profit margins. And there's little indication that the price war between Intel and AMD is about to end.

AMD itself appears to be struggling with how to reconcile its two objectives as it strives to rebuild its margins and return to break-even status by year's end.

During the postearnings conference call, CFO Robert Rivet iterated the old maxim that "the only good factory is a full factory," suggesting that the top priority is to pump out chips and to recoup whatever revenue it can from the output, even if that means big price cuts.

But AMD President Dirk Meyer quickly interjected with a different take on the company's current plan.

"Really, when we think about how much business we need, it's how much revenue do we need to generate sufficient gross margins to cover our product R&D and maintain an increased relevance to our customer base, more so than filling a particular factory," said Meyer.

The differing perspectives underscore AMD's quandary as it tries figure out where it fits into a market dominated by Intel.

AMD is evaluating whether to outsource more of its chip manufacturing to third parties, lessening its own reliance on expensive fabs. AMD's ultimate decision on this front will go a long way toward defining the company's identity.

Some analysts believe going fab-light, or even fab-less, will put AMD at a technological disadvantage and cause it to cede the market for the most cutting-edge chips to Intel.

Of course, AMD has always lagged Intel in terms of manufacturing processes, yet the company has managed to stay competitive through innovations in chip microarchitecture.

In this uncertain environment, say analysts at Deutsche Bank and Jefferies & Company, AMD's stock is sensitive to any announcements relating to the future of its business, from changes in capital expenditures to asset sales.

For that reason, the two brokerages continue to rate the company a hold, despite a less than bullish view on AMD.

Whether AMD is closer to attaining a sustainable business model remains unclear. But every tack the company takes on the journey could provide a short term jolt to the stock.