SAN FRANCISCO (MarketWatch) -- Shares of Advanced Micro Devices Inc. fell sharply Friday, a day after the company posted upbeat results that apparently failed to ease investor concern about the chip maker's prospects.
Analysts cited several possible factors, including investor anticipation of muted earnings in the first and second quarters, heightened competition with rival Intel Corp. /quotes/comstock/15*!intc/quotes/nls/intc (INTC 19.97, -0.03, -0.15%) and worries about the impact of China's bid to restrict credit.
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AMD /quotes/comstock/13*!amd/quotes/nls/amd (AMD 7.98, -0.11, -1.36%) closed down 12.35%, leading a tech sector-wide retreat that saw the Nasdaq Composite Index /quotes/comstock/10y!i:comp (COMP 2,203, -0.37, -0.02%) fall 2.7% and the Philadelphia Semiconductor Index /quotes/comstock/10y!i:sox (SOX 333.19, -0.27, -0.08%) decline by 5.3%.
Analysts were generally upbeat about the company's report, which showed strong gains in sales, particularly for graphics chips.
AMD also unveiled a plan to deconsolidate its financials from those of GlobalFoundries, which was spun off from its manufacturing operations in a move widely expected to ease AMD's financial woes.
"We are increasingly more positive on shares of AMD following stellar results highlighted by revenue growth which actually exceeded that of Intel," Wedbush analyst Patrick Wang said in a note.
He added: "It is the expected completion of its metamorphosis from 'AMD Proper' into the world's second largest fabless company that deserves the most attention. With the consolidation overhang gone, we believe AMD gradually exits the penalty box and transitions into a more typical valuation framework."
Fears over fundamentals
However, Auriga analyst Daniel Berenbaum had a different take, as he downgraded AMD's stock from hold to sell.
While AMD's deconsolidation from GlobalFoundries may be seen as generally positive, he argued, it also means "investors are likely to refocus on fundamentals." And AMD's fundamentals, when viewed next to rival Intel Corp.'s /quotes/comstock/15*!intc/quotes/nls/intc (INTC 19.97, -0.03, -0.15%) , aren't that impressive, he suggested.
"Our work suggests that AMD has a relatively weak product cycle in CPU [central processing] and is unlikely to regain lost market share near term," he wrote. "This is somewhat offset by share gains in graphics, but ultimately the CPU roadmap will be the largest single determinant of success or disappointment."
With AMD's history of "past execution missteps and weak cash generation potential," Berenbaum said investors "should look elsewhere for upside -- for investors who must have CPU exposure, we prefer Intel."
On Friday, Wang also said in e-mails that AMD's stock decline may be due to fears of a "potential global slowdown" arising from worries that China "may increase its lending costs, in result likely slowing down their economic growth."
The GlobalFoundries spin-off was widely expected to ease AMD's mounting financial burdens, and the move appeared to be paying off, analysts say.
FBR Capital's Craig Berger also wrote in a note, "Net, this is a positive report showing that AMD's transformation has enabled the firm to generate cash flow at much lower revenue levels, and with fewer investments required going forward."
But Wang also noted that "with the deconsolidation out of the way, some investors are focusing on actual earnings once again."
"The halo effect that lifted the stock washed away," he added.
Douglas Freedman of Broadpoint AmTech said the Friday decline was still puzzling, although he also noted in an e-mail, "I would agree that first quarter and second quarter earnings power from AMD is not strong and normalizing off those numbers would make the stock look expensive. But the second half of 2010 earnings power is extremely impressive and remains underestimated."
Late Thursday, AMD reported a fourth-quarter profit of $1.18 billion, or $1.52 a share, compared with a loss of $1.44 billion, or $2.36 a share, for the year-earlier period. Revenue was $1.65 billion, up 42% from the same quarter the previous year. On an adjusted basis, the company posted a loss of 8 cents a share.
Analysts had expected the Sunnyvale, Calif.-based chip maker to report a loss of 17 cents a share, on revenue of $1.49 billion, according to a consensus survey by FactSet Research.
AMD cited "net favorable impacts" from its legal settlement with Intel. The Santa Clara, Calif.-based semiconductor giant paid AMD $1.25 billion as part of an agreement to settle their legal disputes.
For the current quarter, AMD said it expects revenue "to be down seasonally."
"AMD's quarter marks another milestone in our transformation and underscores our growing momentum," said Dirk Meyer, AMD president and CEO.
He added: "We enter 2010 having completed the transition to a fabless business model, reached a historic antitrust settlement, and made significant progress strengthening our balance sheet. Our innovative strategy for designing the world's most vivid digital experiences continues to generate demand."
Sales of its core central processing unit chips went up 14% sequentially, while its graphics chip business posted a 40% revenue gain quarter-on-quarter.
