AMD's Issues Are Short Term

On Wednesday,  Advanced Micro Devices (AMD) lowered its outlook for the third quarter. The firm now expects revenue to increase 4%-6% from the second quarter, versus a prior forecast of about 10%, and anticipates that the gross margin will come in at 44%-45% instead of 47%.

AMD blamed manufacturing issues at foundry partner GlobalFoundries, which limited the supply of the new Llano processors as well as some other chips. The firm also noted that Interlagos, a version of AMD's new Bulldozer server processors, began shipping later in the third quarter than management had expected.

We believe the issues facing AMD are short term in nature, and we are maintaining our fair value estimate after updating our near-term forecasts for the firm. GlobalFoundries had manufacturing yield issues earlier in the year, though we had come to believe that they were largely over. As these manufacturing problems are resolved, we expect AMD's latest product cycle to continue to help the firm gain momentum against  Intel (INTC) in the microprocessor market.

The firm's latest Llano Fusion chips, which are targeted at mainstream desktop and notebooks and combine a processor and high-end graphics capabilities onto a single piece of silicon, have been popular with PC manufacturers, and we remain optimistic about the product.

Additionally, more Bulldozer products should be released in the coming weeks, with Interlagos being followed by Valencia (server processors) and Zambezi (high-end desktop chips). We think Bulldozer has significant potential, as it should help boost AMD's competitive position in the lucrative server processor segment, an area where the firm has been particularly weak in the past couple of years.

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