Sometimes, the decision to buy or sell a stock is cut and dried. Other times, it can be a downright head-scratcher, as fellow Fool Anders Bylund contemplated last week.
Such is the plight for shareholders of Advanced Micro Devices (NYS: AMD) after the microprocessor and graphics company reported strikingly better-than-anticipated earnings after the bell on Thursday. The company noted that its new Fusion line of chips has performed well, and its own aggressive guidance hinted at market-share gains in the netbook and notebook segment versus primary rival Intel (NAS: INTC) .
Despite this bullishness, there are 10 distinct reasons you might be better off saying no to AMD at these levels rather than risk chasing this stock any higher.
No consistency. AMD has always struggled to adapt to changing consumer demands and the cyclical nature of the personal-computing industry. It's always about the bottom line, and for AMD, which has lost money in 10 of the past 15 years, the bottom line is usually bleeding a deep shade of red.
No market share. AMD holds roughly a 10% market share and runs a distant second to Intel. That doesn't exactly leave AMD in an advantageous position. From negotiating new deals to securing better margins for its processors, AMD tends to be left scrounging for scraps. It's been able to grab market share from Intel for only short periods of time over the past decade, so why are we to assume these new Fusion chips won't fade in demand the way AMD's previous technological advancements have?
No margins. What victories AMD has been able to claim over the recent years have occurred in the lower end of the personal-computing market. Dell (NAS: DELL) , Asus, and Acer are keeping AMD busy producing chips, but the quantity is hardly enough to justify the shrinking margins. Comparing the recent six-month results against the year-ago period, we see that gross margins fell to 44% from 46% and average selling prices have weakened.
No graphics momentum. Sales at AMD's graphics division are shrinking rapidly, down 17% from the year-ago period. AMD blamed the drop on seasonal weakness and lower discrete mobile-unit shipments, but to me it appears clear that NVIDIA (NAS: NVDA) and Intel are stealing the show. AMD is shuffling most of its resources to researching and developing the fusion chips, but it's at the expense of the graphics segment.
No consumer demand. Sales of AMD's new fusion chips were strong, but its foundation-computing and server-related business weakened in developed markets. Consumers are simply not spending as they were before the recession, and it's hurting AMD on both a revenue and margin front. Price-conscious consumers are purchasing lower-priced PCs, dragging down margins.
No foresight. Although investors were surprised that AMD offered revenue-growth guidance of approximately 10% for the third quarter, it may be less valuable than perceived. Considering that what little guidance AMD has given over the years has been way off the mark, shareholders should take any concrete optimism from AMD with a grain of salt.
No CEO. Since the resignation of former AMD CEO Dirk Meyer in January, the company has been sailing without a captain, and it has shareholders concerned. Four executives -- notably, Apple (NAS: AAPL) COO Tim Cook, EMC (NYS: EMC) COO Pat Gelsinger, and Oracle (NAS: ORCL) co-president Mark Hurd -- have turned down the job offer. We know AMD wants the right CEO, but the question is, does anyone actually want this job?
No leverage. AMD, and most of the microprocessor sector, has little pricing power, since the chip market has become predominantly commoditized. The company touted strength across its Fusion lineup in the second quarter, but its computing and server products saw a drop in average selling price. The company can cut costs only so far before a weakness in margins and a lack of real revenue growth become apparent.
No dividend. AMD has a hard enough time remaining profitable and controlling expenses on its debt-laden balance sheet. It shouldn't be a surprise that unlike rival Intel, it doesn't pay out a quarterly dividend. Whereas Intel's dividend has more than doubled since 2005, AMD shareholders continue to see no extra perks for owning its shares.
No confidence. In the second half of June, short-sellers increased their stake in AMD by 21%. Currently, more than 83 million shares of AMD stock are sold short -- equating to 14.4% of the float. Although large short interest doesn't always equate to a poor investment, it's just another red flag alluding to the potential overvaluation of AMD's stock.
In sum, AMD hasn't shown any consistency on the earnings front to warrant throwing any hard-earned investment money at it. The company lacks a CEO, a dividend, and a real growth driver, but it has plenty of excuses, losses, and short shares held by traders. You might be doing yourself a real favor by saying no to AMD at these levels.
Would you buy AMD? Yes? No? Maybe so? Share your thoughts in the comments section below, and consider adding Advanced Micro Devices to your watchlist to keep up on the latest news in the semiconductor sector.
At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong The Motley Fool owns shares of Apple, EMC, Oracle, and Intel and has purchased calls on Intel.Motley Fool newsletter services have recommended buying shares of Apple, Intel, and NVIDIA, as well as creating a bull call spread in Apple, a diagonal calls position in Intel, and writing puts on NVIDIA. Try any of our Foolish newsletter servicesfree for 30 days.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat's cutting-edge but child-proof.
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