Advanced Micro Devices (AMD) is one of the leading semiconductor design firms that focus on processors for personal computers ("PC"). AMD traded above $40 in early 2006 when the company had notable PC market share but the company has been unable to reclaim its greatness in the increasingly mobile world. Not only have sales of PCs been declining but AMD is controlling an even smaller segment of the pie. Furthermore, there are no real catalysts on the horizon that will spur PC sales as Microsoft's (MSFT) Windows 8 has seen an apathetic reaction from consumers. AMD's stock has plummeted over 70% in the last six months and the vultures are starting to swirl around this $1.4B company. AMD is widely rumored to have engaged JP Morgan (JPM) to explore strategic options for the company as its performance continues into a downward spiral. Is this the catalyst that will spark a fire under AMD's stock? AMD issued a simple statement that it is "not actively pursuing a sale of the company or significant assets at this time." That is likely true - they will not begin consideration until JPM gets up to speed. The stock jumped more than ten percent when the rumor broke but has since slumped to yet another 52-week low of $1.87. That's right, you can now by a share of Advanced Micro Devices stock for about the same price you would pay for a cup of Starbucks (SBUX) coffee.
The subsequent slump in share price is being attributed to the widespread belief that this rumor is just another 'pump-and-dump' tactic but I trust that this rumor has a grain of truth. There is no guarantee that any transaction will result of the JPM consultation but I do believe that AMD is considering its options. Many who dismiss the JPM engagement as false point to recent insider transactions. Insider transactions are rarely direct evidence of any corporate activity. People believe that there can be no insider purchases before such an event as it would be trading on material non-public information. Additionally, people believe that these insiders will not sell before such events as it would not be logical to sell before the stock bounces higher. In this way pundits point to both purchases and sales as proof that AMD is not considering the sale of assets.
First you need to consider if the transaction was automatic or pre-planned. If yes, the transaction is of little significance. Engaging a bank to pursue strategic options would likely be undertaken by the board in conjunction with only the senior-most management (CEO and CFO); therefore, only directors and the CEO/CFO would be precluded from undertaking a new direct sale. Rather than relying solely on insider activity, ask yourself whether it is logical that AMD would consider seeking additional financing or selling assets. Not only is it logical but it would be prudent for management to keep all options on the table. With a potential overhaul of AMD's business on the horizon, what should you do with your stock?
The writing is on the wall at AMD as the company's revenues and earnings continue to decline with minimal hope of reversal. In the third quarter AMD reported a net loss of $157M with gross margins of 31%. Margins declined from 45% in the previous quarter due to a $100M inventory write-down, weaker consumer demand, and lower prices. There are no real bright spots as both computing solutions (microprocessors) and graphics have had substantial revenue declines (11% and 7%, respectively) year-over-year. Many are pointing to the new videogame console cycle as a catalyst for AMD; however, I would not hitch my horses to a strategy that relies on selling $400+ luxury goods when the previous generation is still doing well.
With such a weak financial position the company lacks the flexibility to embark on an independent course of action that can save the company. There are no real concerns for 2013 as the company has a quick ratio of 1.28 but has $3.6B of total liabilities versus only $2B of liquid assets. The financial condition is even bleaker when considering the cash flows: AMD has had negative cash flows from operations and overall for the past two quarters. Selling off assets would make tremendous sense.
For these financial reasons an outright sale of AMD is unlikely and makes a patent sale (or similar transaction) more logical. There are some limitations on the uses for AMD's patents as it relates to personal computers and tablets due to an Intel (INTC) settlement; however, I am confident that intelligent attorneys will find a workaround. The amount of patent related acquisitions and litigation indicates that this is a very hot area and should bring attention to even AMD's limited portfolio. Many articles focus on the difficulties of finding a great suitor for AMD and I do tend to agree but if the market cap slips to around $1.2B I think it is at least worth a speculative play. I believe AMD still has room to decline further since the industry leader, Intel, is also trading at its 52-week low. I would continue to monitor AMD and consider opening a long position on a speculative basis only.
Disclosure: I am long JPM.