Color on Announcement: AMD (NYSE:AMD)

Several firms commenting Advanced Micro Devices (NYSE:AMD) after co announced yesterday morning that it is unlikely to meet its revenue guidance.

- Morgan Stanley believes AMD's margins will be under severe pressure as it suffers from aggressive pricing competition in MPUs, as well as a product line that is currently inferior to its primary competitors. While AMD's product portfolio should be more competitive in the second half of this year, firm expects its financials to remain under pressure for at least several quarters. Meaningful losses are likely during the first half of this year, and they could continue into the second half of the year as well. In addition, firm believes that AMD will need to raise capital to fund its previously planned capex investments for 2007. Consequently, they maintain their Underweight-V rating on AMD.

Firm's 2007 and 2008 EPS estimates are now ($0.50) and $0.60 respectively versus $0.15 and $0.84 previously.

- Cowen notes that AMD announced that 1Q07 (March) results would likely fall below rev guidance of $1.6-1.7B, down 4-10% seq. Mgmt attributed the primary source of weakness to inability to provide certain commitments to their distributors which have resulted in share losses presumably to INTC. Mgmt admitted to having "taken their eye off" the ball with respect to its distribution partners as AMD ramped into new OEM customers. Mgmt continues to highlight pricing pressure in the server end market as a significant source of weakness. Firm believes it is too early to call a bottom in shares of AMD. In their opinion, the visibility limitations make a valuation call on these growth shares incredibly challenging. Firm expects the data flow regarding fundamentals to remain negative over the near-term. Without any significant positive catalysts on the horizon, they expect shares to remain under pressure.

Firm expect the pricing pressure coupled with the integration of ATI's lower margin consumer-related business units is likely to result in sustained GM pressure. They believe the feasibility of achieving the 50% GM target exiting 2007 appears increasingly unrealistic.

- JMP offering contrarian view, upgrading the share to Market Outperform from Market Perform, with price tgt of $15 based on 15x their Street-high 2008 EPS estimate of $1.15 (Street @ $0.78 with a wide range). The upgrade is based on:

Firm's proprietary industry and channel research indicates that AMD's next-generation "Barcelona" quad-core server chip and next-generation low-power mobile PC processor chip is exhibiting excellent power, performance, scalability, and price/performance characteristics at key OEM customers such as HPQ, Dell, IBM, Fujitsu-Siemens, Sun, and Lenovo. Firm believes that the next-generation quad-core Opteron server chip and the next-generation low-power mobile processor chip will level the playing field with Intel. The new products may allow AMD to regain the performance mantle in the high-margin server chip market with performance gains of 20-30% over equivalent Intel Xeon server chip while also allowing AMD to target the high-margin corporate and small-business notebook PC market with bundled low-power processor/integrated graphics solutions.

While the ATYT merger has been a rocky one with delays and market share losses in several discrete and integrated graphics segments, firm's research suggests that the new AMD Series 690 integrated graphics chipset for desktops and notebooks, with full support for Vista DX10 graphics, HD video, and Blu-Ray/HD DVD, will likely allow AMD to achieve renewed success in the consumer and corporate PC market. Also, despite a 30-45 day delay in the production availability of AMD's next-generation high-end R600 discrete graphics chip competing with NVDA's GeForce8800, firm's research indicates that AMD has successfully addressed the production and power bottlenecks with the R600, and the solution will likely be successfully bundled with AMD's high-end Athlon64 processors for OEM and channel customers.

Firm's research also suggest that AMD's manufacturing yields on 65nm technology on 12-inch wafer production are ramping well, about one quarter ahead of schedule, and will likely allow AMD processor margins with the better product mix to quickly rebound to the 50-52% level from current levels of 40% over the next 12 to 18 months. Given the increased production volumes, AMD will likely be able to satisfy its rapidly expanding OEM and channel customers with plentiful supplies of high-end dual-core processors beyond the current quarter.

Notablecalls: While most of the Street is negative (to say it mildly), I actually like JMP's opinion. Too bad they are probably 1-2 qtrs too early with the upgrade. However, if they are right about Barcelona, AMD shareholders do have better times ahead.