Companies That Management Can’t Fix: AMD

There are certain companies that probably cannot be turned around no matter who runs them. They tend to be in industries where macro-economic trends are against them, like the buggy whip business 150 years ago.

Investors are not likely to get much out of these firms, unless and until the trend that is hurting them is reversed.

As AMD gained share in the server and PC markets, its stock moved up and Intel’s (INTC) dropped. AMD (AMD) had the better product. From early 2003 to early 2006, AMD moved from under $5 to over $41.

But, AMD needed to keep a significant technology edge. It was still the smaller company, but a lot.

And, Intel has gone on the attack. Its chips have, in the opinion of may on Wall St. overtaken AMD’s in both computing and power consumption. Intel has now actually begun to take back chip share in the server market. AMD lost over a share point in servers during 2006. Some analysts believe that AMD’s best chance of gaining new markets, especially PCs, is behind it. One firm, quoted by MarketWatch said: "There is the potential that AMD will continue to gain more of Dell’s business, but we think that the current offerings by Intel should competitively slow any further gains by AMD in the desktop and mobile space."

The battle with Intel is also weakening AMD is a way that may be hard to recover from. Its gross margins for Q4 06 were 40%, down from 57% in the same period in 2005. And, the company expects price competition to stay tough: The company’s CEO confirms this telling MarketWatch: "Pricing is incredibly challenging. We expect it to be for at least all of the year, but in particular for the first half of the year," he said. 

AMD’s situation has become difficult enough that one Wall St. firm thinks the chip company may have to raise money in the next six months. An analyst from ThinkEquity told the Associated Press: "We advise investors to limit their exposure to AMD shares until cash is raised and new product benchmarks are made available."

The problems have shown up in the stock price. In the last year, AMD has dropped from over $40 to under $15.

With its products no longer considered better than those of its larger competitor and severe financial problems, AMD is highly unlikely to do much better than tread water for the foreseeable future.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.