AMD Under 3

If you haven’t noticed, stock prices haven’t been doing too well lately.

In the last two months, its stock price has dropped 50% and closed below $3 yesterday.  This makes AMD now worth a bit less than $2 billion.  This is about a 93% drop from its $40+ prices back in February 2006. 

Ouch!

However, if misery loves company, AMD is getting a LOT of companionship from its competitors lately.  If you compare yesterday’s stock price to that of just two months ago, you’ll find that nVidia’s and Dell’s stock price have dropped by half, too.  Apple is down by almost half and Intel by almost 40%.  Hewlett-Packard did best, it’s stock price has dropped by “only” a third. 

And this is before any slowdown or recession affected their earnings and profits!

What should we gather from all this?  Two seemingly contradictory lessons:

1) You can’t buck a flood: Right now, fear is carrying everything with it.  It doesn’t much matter whether a company is doing terribly well or not.  It doesn’t much matter whether the stock was overvalued or not before the bears took over the stock market.  It doesn’t much matter how much a slowdown/recession is likely to hurt company profits.  The tide is going one way, and it’s taking everything with it. 

2) Is there anything really wrong here? There are two good reasons why stocks plunge in value: times are going to be bad for a while, and times are going to get bad and stay that way.  If you look at the financial institutions, the good times are over.  Their wings have been clipped by their losses, and government regulation will make sure those wings stay clipped.  Eventually, somebody will come up with some new way to make fast, easy money, but no time soon.   Most will survive, but times will be considerably less exciting and profitable for quite some time to come. 

In contrast, people aren’t going to stop buying computers much more than they’re going to stop eating.  They may not buy as many as often or spend as much, but they’ll keep buying.  When times get better, they’ll buy more and the computer industry will go back to business as usual.  So will most of the stock prices (those that don’t won’t solely because of bad things they’ve done).  

Unlike the tech bubble, when everything, good, bad or indifferent was overvalued, and the bursting of the bubble caused a permanent drop in share prices, these drops are caused by fears of recession, which won’t be all that bad and definitely will be temporary.  While the markets haven’t finished panicking yet, when they’re finished doing that, there ought to be some real bargains out there.   

Ed

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