AMD Is On Life Support
Semiconductors represent a pivotal aspect of the tech industry by providing computer circuitry with electronics that can amplify or diminish the conducting charges and thus deliver information at the necessary rate needed to run a program. With the exponential growth of computer usage across the world, investors may think that superconducting companies represent a fantastic opportunity for value and growth given the sine qua non of the tech world. Yet the example of Advanced Micro Devices shows that not all that glitters is gold, and that corporate mismanagment can sink a company's stock value just as surely as a poor product or bad marketing or customer apathy. AMD stock (AMD on the NASDAQ, trading for $1.79 a share) has been one of the absolute worst investments that you can put your money into since 2000, when the company traded for nearly $100 per share. Since then, it's been nothing but bad news for the California-based company. Does any hope remain at the bottom of the barrel for AMD stock and shareholders?
With the release of second-quarter data, we can look at the company with a critical eye and determine where their business plan has failed. Their revenue has dried up faster than a watering hole on the Serengeti, dwindling to $950 million, a 35% loss compared to 2014 Q2 and the first time in a decade and a half that they have failed to clear one billion dollars in earnings. Their computing and graphics departments, which produce the CPUs and GPUs needed to keep computers up and running, have taken it especially hard, dropping over 50% in Q2 thanks to monumentally poor sales from over $800 million to less than $400 million. While their enterprise segment has also fallen in value, they've lost "just" eight percent, making it the best-performing department of the company on the virtue of the fact that they haven't had double-digit losses. During 2014 AMD enjoyed a Q2 profit of about sixty million dollars; this year their Q2 profit stands at negative thirty million dollars. This, however, still pales in comparison to the ninety million dollars of lost earnings in non-GAAP (adjusted) income. A 25% loss of gross margins and a 30% yearly decline projected for the entirety of 2015 makes for a particularly toxic stock, having lost 50% of its value in less than the last twelve months.
Will AMD declare bankruptcy? For a company that still brings in nearly one billion dollars per year, the answer right now appears to be "no". By 2020, however, the company will have had nearly ten straight years of negative performance, nullifying their cash flow and forcing their board of directors to consider liquidating the company in order to get whatever value they can salvage from its remains. Kerrisdale Capital believes that AMD has less than five years left of viability, a report that positively torched their stock value in a self-fulfilling prophecy, claiming that the company's inability to put capital into their R+D department will cripple their competitive capabilities and leave them well behind as other semiconductor companies take the reins. While AMD gets a bit of leeway in their favor thanks to their deals to provide Apple Computers with chips for MacBook laptops, it's important to remember that Apple has turned from the personal computing business to the smart phone business and almost certainly will not reverse its business trajectory, pushing AMD further and further to the margins. Unlike chip producers like Intel, furthermore, AMD doesn't have an in-house development team, meaning that their products have to compete solely on their architecture, which currently has failed time and time again to pull its weight.
The failure of the PC market writ large can be measured by the failure of AMD to deliver value to shareholders. Their peak stock price of 2000 and the rapid decline matches the overall disinterest in computer purchasing by a customer base that has increasingly turned to tablets and smart phones rather than higher-end computers for a fraction of the price. Yet not all chip manufacturers are feeling the heat quite like AMD. Arch-rival NVidia (NVDA on the NASDAQ, trading for $20.07 a share) has enjoyed almost 50% growth in the past three years thanks to their superior efficiency that results in a lower price tag overall than the bigger-name and bigger-performing AMD chips. With AMD research and development feeling the heat of the chopping block, having been cut by fifteen percent in the past year alone, the company has robbed Peter to pay Paul by hamstringing their own engineering team from coming up with better performance that could potentially save the company's bacon. Cost trimming represents a necessary aspect of any business model, but no tech company can compete when they shortchange their own research efforts. Since AMD has been sitting on inventory, failing to clear nearly seven hundred million dollars worth of products in the past two years (rising fifteen percent per year), they face the unpleasant reality of needing to sell products that nobody wants to buy on a shrinking market that's performing even worse than the company expected. Since the company has nearly a billion dollars in cash reserves on their books, AMD can keep their head above water for the near future. That doesn't provide value to shareholders, however, and will drive down their stock price further and further. There's no reason to think AMD can find a light at the end of the tunnel or a unicorn to salvage their brand. Investors who hold AMD outright or as part of a tech mutual fund need to cut their losses before the company collapses under its own weight and becomes yet another relic of the tech bubble that managed to hang on for another decade.