Certainty Not Cinched at AMD

An early return to profit hasn't offset concerns surrounding the company's flash-unit spinoff.
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surprised investors by keeping the momentum going in its PC chip business and by improving results from its memory unit during the second quarter, but it hasn't exactly eliminated the uncertainty in coming months.

Investors responded Thursday to AMD's

better-than-expected second-quarter results announced Wednesday by lifting shares briefly above $20 -- the first time since early January -- but the stock recently pulled back to $19.51, up 1.3% for the session.

AMD said third-quarter computer-chip sales would exceed the normal seasonal growth pattern, which is typically around 8% sequentially. But it wouldn't comment on expected results for its memory business, which is slated to be spun off, possibly in the fourth quarter.

In light of the uncertainty surrounding the memory business, which remains the company's primary question mark, analyst reaction to AMD's results was positive but somewhat guarded.

However, while work still needs to be done before the unit can be sold to the public, AMD did provide some room for optimism regarding the operations, which accounted for 37% of sales: AMD cut its operating loss by $20 million to $90 million and is promising even more cost cuts.

Similarly, the company showed some growth in MirrorBit, a flash-memory architecture that AMD debuted in 2002, but it has struggled with widespread adoption. The architecture is purported to have a 30% cost advantage to competing technologies.

This latest quarter, however, showed some interesting trends for MirrorBit, and that's key to the future of AMD's flash business. MirrorBit rose to 20% of memory sales, and AMD said it was seeing strong demand from cell-phone makers for second-generation MirrorBit devices.

If MirrorBit can continue to grow and garner design wins, the memory business will benefit from having a production-worthy, extendable, unique technology.

Memory results are subject to extremely volatile fluctuations brought about by supply and demand conditions and by the competitive landscape with archrival


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That's partly why AMD is moving to spin off the memory group, formally known as Spansion. But what's left following that spinoff -- whenever that may be -- is increasingly becoming an topic of debate.

Analyst Ben Lynch of Deutsche Bank said current views are too optimistic regarding AMD's post-Spansion earnings and valuation. Using a couple of different methodologies, but basically taking into consideration a higher tax rate, a lower operating margin because of ongoing corporate overhead not included in the computer chip unit, and the loss-generating networking products group, he pegged post-Spansion AMD's share value at between $12 and $17. With a $4 valuation on Spansion, that makes AMD's current price close to fully valued, according to Lynch, whose firm has received payments from AMD for investment-banking and non-investment-banking services in the past year.

Another analyst, Les Santiago with Piper Jaffray, said the recent run in the stock has already discounted the spinoff and the strong performance of the computer chip unit. He also cautioned about the IPO's prospects, citing ongoing losses, low margins, intense competition, high debts and an undetermined fate as a standalone company. Piper Jaffray seeks to do investment banking business with the companies its analysts cover.

Beyond acting as price weights, any of these factors could delay the IPO. This, in turn, would harm AMD, which would be seen as being tethered to a sinking ship. The company most likely wants to avoid a repeat of this year's start, when its memory business plunged the overall company to losses in the fourth and first quarters.

Still, the negative factors swirling around Spansion's future put the success of an IPO -- and the financial benefits to AMD -- into question. Spansion's losses, debts and fate as an independent player are the largest issues for the unit, and consequently for AMD. Until answers are provided, these issues could prevent AMD's stock from advancing significantly further.