For years, Advanced Micro Devices (AMD) has been the plaything for traders looking for buyout bait.
Actually, the latest example of this came last week, when a report from Fudzilla touted that Intel (INTC) and Microsoft (MSFT) were interested in a deal. But alas, the gains on AMD stock quickly evaporated as an analyst from Citigroup dismissed the idea.
Why? Well, first of all, Advanced Micro is really a hodge-podge of businesses, none of which are particularly healthy. The PC segment is perhaps the worst. Let’s face it, the market has suffered a secular downward spiral as mobile devices have become much more ubiquitous.
Consider that — back in late August — IDC revised its PC shipments forecast down again. The research firm now believes that there will be a grueling 8.7% drop for this year and that the declines will continue through 2016. The prior forecast was for a 6.2% decline.
AMD Stock Continues to Lag Behind
But for AMD stock, the situation is much worse because Intel continues to gain market share in the PC market. Then again, this should be no surprise since INTC has massive scale and can invest substantially more in R&D. Based on research from IDC and Mercury Research, INTC has 83% of the desktop market and at least 90% of the notebook market.
If anything, the relentless deterioration in the core business of AMD will only exacerbate things. According to the company’s most recent 10-Q:
“We cannot assure you that we will be able to generate cash flow or that we will be able to borrow funds, including under our secured revolving line of credit for a principal amount up to $500 million (our Secured Revolving Line of Credit), in amounts sufficient to enable us to service our debt or to meet our working capital requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, we may be required to sell assets or equity, reduce expenditures, refinance all or a portion of our existing debt or obtain additional financing.”
Keep in mind that AMD sports a debt load of about $2.27 billion and is required to pay over $180 million each year in interest payments.
Now it’s true true that AMD offers chips for the graphics markets as well. Yet the problem is that the company has been rapidly losing out to players like Intel and NVIDIA (NVDA). According to Mercury Reserach, the market share for AMD has plunged to somewhere between 18% and 24% — down from roughly 37% a year ago.
And despite the lower valuation on AMD stock, don’t expect MSFT or INTC to come sweeping in for a buyout. MSFT really has no strategic need to be in the PC processor market or to develop its own graphics chips. Besides, moving into these categories would likely alienate INTC, which is a key partner.
And as for INTC buying out AMD stock, there also seems little need for the technology. Let’s face it, INTC already has a massive lead. One possibility is that the company may be interested in the patent portfolio. But if so, INTC would probably just buy the portfolio outright — not the whole company.
For the most part, AMD stock is really in a tough spot. The company’s financials continue to deteriorate and may get even worse because of the slowing of the global economy. What’s more, the competitive pressures will likely to take a toll as AMD must fight against tough rivals like INTC and NVIDIA.
So while AMD stock may have an occasional boost from buyout rumors, the gains will likely be ephemeral. In other words, no reason to go anywhere near the stock anytime soon.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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