Should AMD Blame Itself for its Losses? - Apple (NASDAQ:AAPL), Advanced Micro Devices (NASDAQ:AMD)

Advanced Micro Devices

AMD

announced revenue of $1.69 billion and a loss of 24 cents per share for the last quarter of 2011. Operating income at $71 million--almost half of the previous quarter's income of $138 million--failed to keep the company in the black. The semiconductor company failed to meet estimates of $1.72 billion of revenue, which analysts hoped would yield 16 cents earnings per share. Instead, the company's results show a loss largely due to the company's investment in Globalfoundries, which cost the semiconductor $209 million. AMD also restructured its operations, which cost the company a further $98 billion. While AMD might hope that these one-offs explain away the company's negative performance, investors should dig deeper. The company's revenue was flat compared to the previous quarter and increased by a mere 2% from figures in Q4 2010. While the company's gross margin stayed roughly in line with previous results at 46%, this is more thanks to restructuring than higher demand for AMD's chips. Recently, sluggish demand for PCs has been a difficulty for AMD, which has failed to attract significant business for its

tablet processor

at a time when tablets are cannibalizing sales of

older devices

. Growth in the tablet market has helped Texas Instruments

TXN

, whose chip

runs

the Kindle Fire. In August of last year, AMD released a

blog post

on this very issue. The company concluded that a lack of media, streaming services combined with hardware challenges to make it difficult for competitors to take market share from the iPad. This was a poor excuse, and investors saw through it; while AMD saw its stock price plummet in September as the company continued to fail to take a piece of the tablet market, Amazon

AMZN

saw a steady climb in price as investors saw enormous potential in the affordable device. (However, AMZN fell again on lower earnings before Halloween and has since fallen further.) AMD's drop in October lead the stock to an attractive P/E ratio below 5, which it still held (at about 4.72) by the close of trading on Tuesday. The stock's affordability helped it achieve an upward momentum in December, while bullish sentiment for the tech sector dragged AMD up along with many others, such as NVIDIA

NVDA

and MIPS Technologies

MIPS

. The bullish momentum has more to do with the steady fall that these companies experienced in 2011; NVIDIA was down 10% and MIPS down a stunning 70% for the year. AMD fell almost 34% last year and still has failed to achieve the traction necessary to make up for the year's losses. The company is financially positioned to expand. It has over $1.76 in cash and only $489 million in current debts, and its investment in Globalfoundries should give it greater manufacturing clout. However, the company will need to improve its research and development track record to improve on last quarter's loss. For example, the company's recent plan to

scrap APUs

planned to be produced by Globalfoundries points to its disappointment in the foundry company. AMD's dissatisfcation with the company is old news; in April, AMD

renegotiated a deal

with Globalfoundries after it felt Globalfoundries was not improving its 32nm processes. The difficulties led to a delay in the 32nm SOI Opteron chipset that has shown AMD fall further behind Intel

INTC

, whose stock rose over 15% in 2011. Some will say that AMD has no one to blame but itself, since Globalfoundries is the result of AMD divesting itself of its manufacturing operations in 2009 in the hopes of streamlining the company. It took less than two years for such streamiling to fail the company. AMD's stock has fallen over 2.5% in after-hours trading on the news, and investors may see further drops tomorrow when more investors assess the company's viability at a time when PC demand continues to fall. AMD may need to capture more of the tablet, smartphone, and server markets to maintain competitiveness amid growth at Texas Instruments, Intel, and Apple

AAPL

, whose A4 and A5 ARM processors are becoming the dominant chips in the tablet and smartphone markets. Since the chips are manufactured by Samsung and AMD has shed much of its manufacturing capabilities, the company will need to find a new way to make and keep a presence in the portable computing market if it wants its share price to return to the heady days of 2005 and 2006.

ACTION ITEMS:

Bullish: Traders who believe that AMD is becoming a cheap proposition thanks to a low P/E ratio might want to consider the following trades:

Buy AMD as it falls below $6.4 and wait for a resurgence on stronger sales and a return to profitability after Globalfoundries woes disappear. With one of the lowest P/Es in the tech world, it is a bargain compared to Intel's 11.22 P/E.

Bearish: Traders who think that AMD is a lost cause may want to think about some alternatives:
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Other chip makers are trading at lower prices due to a fall in 2011. NVIDIA and MIPS have faced some upward momentum in recent days, and NVIDIA bucked the industry trend on Tuesday with a steady rise in trading. MIPS will release its earnings tomorrow, and the stock has begun to recover from a steady fall over the previous week.
With IT becoming a part of modern life on every continent, the need for semiconductors isn't going to go away anytime soon. A semiconductor ETF like Market Vectors Semiconductor ETF SMH has a dividend yield near 2%. Be warned: it is trading near its 52-week high of 36.99 when a number of semiconductor companies are still down for the year.

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