The Advanced Micro Devices Inc. Securities Fraud Lawsuit: What You Need to Know

By Markets Fool.com

Chipmaker Advanced Micro Devices must "face claims that it committed securities fraud" in "hiding problems" with the launch of a chip code-named Llano, according to Reuters.

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AMD reportedly told investors it would deliver ample supply of Llano chips beginning in the second quarter of 2011. The reality, according to Reuters, was that the company faced supply constraints. To make matters worse, by the time AMD worked through its production issues, demand for those chips had dried up. This is a fast-moving sector, after all.

Then, in an earnings warning in October 2012, AMD said it would take a writedown on $100 million worth of Llano inventory that it simply couldn't move. Reuters reported that, as a result of this alleged deception, the plaintiffs seek damages for investors who purchased AMD stock "between April 2011 and October 2012."

The huge fall in AMD's share price
According to Reuters, the plaintiffs allege that AMD's stock fell by 74% from March 2012 to October 2012 due to the market learning about the severity of the Llano supply situation.

While the $100 million inventory writedown unquestionably cost shareholders, I'm not at all convinced the stock-price drop from $8.35 to $2.18 had much, if anything, to do with the Llano situation.

Let's dig a little bit deeper, shall we?

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AMD in 2012
Here's a chart of AMD's stock price during 2012:

Source: Google Finance.

Notice how things were going pretty well until the shares started sliding around late March/early April? Well, during this time, AMD likely didn't face supply constraints on Llano, and by April 2012 it had even begun shipping Llano's follow-on, known as Trinity.

In my view, the biggest problem facing the company in 2012 was a weakening PC market: Both AMD and larger rival Intel reported declines in their respective PC-related revenue for the year.

In July 2012, AMD pre-announcedthat revenue for the second quarter of the year would be down 11% sequentially. The previous forecast had been for a 3% decline.

Then, when AMD finally reported results for the second quarter, the company said it expected revenue to "decrease 1% sequentially +/- 3%." That was not so great (the second half of the year is supposed to be seasonally up), but things got worse when AMD negatively pre-announced again.

During that pre-announcement, AMD said revenue would drop 10% sequentially, instead of just 1%. The chipmaker also said it would take the $100 million inventory writedown related to the Llano chips.

The writedown wasn't why AMD stock plunged
Whether AMD shaded the truth regarding the Llano supply situation or not, I think, has little to do with the painful share price decline in 2012. AMD's shares had already taken a beating well before management announced the writedown.

I believe the share price declines both beforethe writedown and after were due to a much weaker than expected PC market, coupled with very aggressive competition from Intelas it fought to stabilize its own PC chip shipments in a tough market.

Finally, for a more visual illustration of why the inventory writedown was hardly a major driver of AMD's stock loss, look at the following chart:

Source: Google Finance.

Intel, which derives most of its revenue and profits from PC chip sales, experienced a very similar trend in its share price during 2012. Now, the decline wasn't as steep (AMD is a far more volatile stock, and that volatility cuts both ways) but the directions were roughly the same.

The article The Advanced Micro Devices Inc. Securities Fraud Lawsuit: What You Need to Know originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.