AMD's stock slumps on analyst's downgrade

AMD's stock price took a hammering yesterday, slipping almost 13 per cent following one analyst downgrading his recommendation from 'hold' to 'sell.'

James Covello, analyst at financial giant Goldman Sachs, issued a recommendation last night that saw the chip giant's status downgraded from 'hold' to 'sell' - meaning Covello strongly advised those with AMD stock still in their portfolio to get rid of it but-quick, even as the company announces hope for the future on the back of new hardware and next-generation console deals.

Investors took Covello's analysis to heart: in trading on the US market yesterday, AMD's stock plunged 12.56 per cent to $3.83 per share for a total market capitalisation of $2.73 billion. In after-hours trading, the company continues to lose out with a further 0.26 per cent being trimmed off its price. The drop came after a month of gains in share price that saw the company's value peak at $4.40 a share in the days prior to the sell-off.

While AMD's share price is still comfortably above its April low of $2.31 per share, the latest drop in value is a worrying sign that investors are beginning to lose confidence in the company. By contrast, rival Intel's share price - based on a significantly larger $118.4 billion market capitalisation - dropped just 1.07 per cent yesterday on news that box-shifter Dell's profits had dropped a whopping 79 per cent in its last financial quarter as a result of slowing demand for PCs and laptops.

Covello's recommendation that investors rid themselves of overpriced AMD stock is a volte-face from his position back in 2006: 'Investors will increasingly question Intel's franchise value until/unless their pricing strategy begins to slow down AMD's momentum,' the analyst claimed, at a time when Intel was posting multiple consecutive quarterly revenue shortfalls and its plucky rival AMD had the upper hand in desktop processor market share.

A lot has changed since 2006, however. Intel's decision to ditch the Pentium 4 family and its performance-crippling NetBurst architecture that year and instead go back to the P6 architecture with its Core family would see AMD's performance lead eroded. AMD's answer was the Bulldozer architecture, a server-centric design appeared to repeat some of the flaws found in NetBurst - and, so far, has failed to do much for AMD's market share.

A more promising direction for the company has been its accelerated processing unit (APU) products, born out of what was once known as Fusion. Building system-on-chip-like products that combine relatively high-performance graphics - never Intel's strong suit - with reasonable x86 cores has allowed the company to gain ground in the budget end of the market, while attracting the attention of Sony who ordered a customised version of the next-generation Jaguar chip for its upcoming PlayStation 4 games console. Microsoft, too, is reportedly impressed with AMD's efforts, and is thought to have designed its next-generation Xbox around a similar semi-custom APU.

In Covello's most recent note, the analyst claimed that the biggest problem facing AMD was the global slowdown in the traditional PC market. 'We expect disappointing results in the PC segment to mitigate the impact of increased revenue from gaming,' Covello told investors of the company's headline-grabbing console deals.

For AMD, the analyst's vote of no confidence is a bitter blow, and has demolished many of the gains the company has made over the past year. It's clear that the company still has much to do to win back the trust of Wall Street - hence AMD's recent announcements of ARM-based Opteron chips, its Fusion-successor hUMA and its official semi-custom processor division, all of which are distinct divergences from the company's traditional x86 chip business. For a company that has positioned itself as poised for a comeback, the next financial year looks like being make-or-break for the company.