Advanced Micro Devices (AMD), on Wednesday, slashed its revenue growth outlook for its third quarter to an increase of 4% to 6% from the range of 8% to 12% previously. The chip maker also cut its expected gross margin for the period to 44% to 45% from 47% before. The company noted some problems regarding yield and manufacturing issues at one of its German foundry partners (Globalfoundries Inc.). Given that most of the issues arose from complexities related to the use of common tools, we’re not sure that we can take such an explanation at face value. It’s likely that this pre-announcement by AMD may be setting up for a further disappointment in the back half of this year, particularly as it relates to gross margins since the current manufacturing problems are with products with higher average selling prices. Importantly, however, the revenue shortfall is exclusively due to manufacturing and supply disruptions, not a new demand problem (with PC’s), which means we cannot extrapolate this poor performance by AMD across the chip sector to Intel (INTC) or Texas Instruments (TXN). With the delays related to AMD’s new Llano and “Interlagos” processor lines combined with its relatively uncomfortable debt load (primarily from its acquisition of ATI Tech a number of years ago), we’d remain on the sidelines. The low end of our fair value estimate range of $7 per share for AMD remains unchanged, despite the poor news.
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