AMD Cuts Third Quarter Outlook - Analyst Blog

Advanced Micro Devices (AMD) trimmed its third quarter guidance, citing softness in the consumer notebook markets in Western Europe and Asia.
 
The quarter, which is to end on September 25, 2010, usually experiences positive seasonality, driven by the back-to-school phenomenon. However, AMD's expectations of a 1-4% sequential revenue decline (compared to previous expectations of a sequential increase) follows Intel Corp's (INTC) guidance cut last month, indicating that some other factors are at play.
 
To our mind, consumers have tightened their purse strings, but this is not the main reason for the weakness at these two companies. We believe that Apple Inc's (AAPL) iPad is creating havoc in the consumer notebook segment. Apple's iPad is cannibalizing notebooks and the next version, to be released in the first half of 2011, will not make matters easier. Apple is also seeing some traction at corporate customers, which is a further negative for x-86 players, Intel and AMD.
 
AMD's position is slightly shakier than Intel's, because in spite of the company's decision to shed off its “value” image, AMD chips in many cases, continue to lag Intel's in terms of performance. Consequently, the company has not gained the desired traction in the data center segment. Therefore, with its consumer business getting cannibalized by the iPad and its enterprise business facing stiff competition, AMD has some rethinking to do.
 
We think both Intel and AMD, and possibly graphics chipmaker NVIDIA Corp (NVDA) will see most of their growth in the near to mid-term coming from developing/emerging markets. Since Apple's distribution network in these regions is not that great yet, the companies have better prospects here.
 
We advise against processor plays in the near term, as indicated by the Zacks Rank of #4 (short term sell rating) on both Intel and NVIDIA shares. Although the Zacks Rank for AMD is still #3, we expect it to move down following this announcement. Our longer-term ratings on all three are neutral, as we recognize the potential in these behemoths and believe that investors with a longer time horizon would benefit from waiting for a more favorable exit point.
 

 
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