AMCC's Neutral Rating Retained - Analyst Blog

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We reiterate our Neutral recommendation on Applied Micro Circuits Corporation ( AMCC ).

The recent launch of the industry's first 64-Bit ARM processor has indeed kindled a revolutionary upsurge with its new X-Gene Server On a Chip platform. This product also has the potential to offset the negatives of poorly performing segments of the company, thereby elevating it to sky-high pedestals with total available market ( TAM ) generation capacity of up to $6 billion.

Optical transport network (OTN) products have become an integral source of revenue for Applied Micro, rising approximately 37% sequentially since the last quarter. One can now comfortably be prescient of the favorable future yield prospects arising from OTN in the coming quarters.

AMCC recently announced its 2012 second fiscal quarter's financial results which did not paint a pretty picture. Sales dropped 2% year over year to around $64.9 million. Earnings per share beat the Zacks Consensus Estimate coming in at a loss of three cents per share. Gross margin declined substantially to 57.3% from 64.4% in the last year quarter.

The contagious macro environment along with poor quarterly revenue yields may eventually lead AMCC to raise its EPS loss by four cents per share in the next quarter. Moreover, management expects third quarter overall revenues to diminish 10% to 15% sequentially.

Applied Micro continues to wrestle with very tough and progressive rivals in the semiconductor industry. Big players here are Broadcom Corp. ( BRCM ), Intel Corp. ( INTC ) and LSI Corp. ( LSI ). The company does not appear to be in a good enough position to battle these formidable competitors with its current weakened quarterly outlook.

Heavy investment costs have been incurred for the development of the 64-Bit ARM Processor. Applied Micro can contend this situation by adhering to the 'no pain no gain' philosophy but it is now ubiquitously known that fruits of this venture are anything but impeding. The 'pain' might get too onerous to bear for the company until real gains are earned from this product which are difficult to obtain before another 2 years or so.

In the short run, we have a Zacks #3 Rank for the stock, which translates into a short-term rating of Hold. We currently retain our long-term Neutral rating for the company. Maintaining a sideline stance with regard to the stock of Applied Micro is a wise decision considering the company's present nebulous scenario.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AMCC , BRCM , INTC , LSI , TAM

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