Shares of Advanced Micro Devices (AMD) dropped 4% in the 11/25 trading session, giving back nearly all of their gains from the 11/23 session. Right now the company is worth $1.33B, has seen a huge drop in institutional ownership, a sharp rise in short interest, and is trading at near all-time lows. Does this sound familiar?
Nokia (NOK) hit its 52-week low of $1.63/share in July in a relentless display of selling pressure and has since violently rebounded to the most recent close of $3.42, a well over 100% gain from the lows. The story seemed about the same on the surface: it was burning cash, being outgunned by much stronger competitors, and all hope seemed to be lost.
Well...not so fast! While there are some optical similarities between the share price action of the two companies, a deeper dive into valuation, patent portfolios, balance sheets, and the operating sector need to be analyzed in order to construct a proper analogy.
AMD Does Not Have Nokia's Valuation Support
The first and most obvious sign (that I unfortunately missed) that Nokia was ridiculously oversold at the $1.63 level was simply one of valuation. At a share count of 3.74B, the firm was valued at $6.1B. A quick look at Nokia's balance sheet reveals $11.4B in cash and short term investments against $6.7B in interest bearing liabilities for a net cash position of $4.7B. This valued the entire business at a mere $1.4B.
AMD on the other hand has $1.48B in cash and marketable securities against $2.04B in debt for a net debt position of $560M, which means the current market capitalization of $1.33B values the company at $1.9B.
Patents - Well, Well, What Do We Have Here?
A hot topic these days, especially for trying to establish a floor on the price of a speculative turnaround story, is the value of the fallen firm's patent portfolio. This actually gets a little tricky. Nokia, surprisingly enough, owns a good deal of the patents related to 4G. According to the fine article, "Nokia Patent Portfolio An Untapped Gold Mine" by brnichols, Nokia is the leading owner of 4G/LTE patents with 18.88% of the pie. Qualcomm (QCOM) and Samsung take the #2 and #3 spots with 12.49% and 12.19%, respectively.
4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones. The patents here are valuable and relevant. This provides Nokia with further valuation support as patent licensing seems to be quite a lucrative venture these days.
In short, patents are valuable.
Turning to AMD, we note that the firm has a cross-licensing deal with chip giant Intel (INTC). Since AMD got the jump on Intel by developing 64 bit extensions to X86 while Intel tried to pursue a "clean slate" approach with its "Itanium," AMD won the mind- and market-share of software developers, forcing Intel to adopt AMD's 64 bit extensions. This means that every Intel processor is using AMD licensed technology (of course AMD has access to all of the patents related to the multiple SIMD/Vector instruction sets that Intel has developed to significantly enhance performance).
This is where things get good. What happens if AMD goes bankrupt? Or, worse, what if AMD sells out to a company that has been itching to muscle into the PC processor space. Perhaps Nvidia (NVDA)? Or Qualcomm? What about Samsung? Or maybe even Mubadala Development Company (which already owns Global Foundries - AMD's old fabrication plants - and 19.4% of AMD itself)
There is a chance that one of these other companies could get a hold of the key patents in the case of an AMD bankruptcy. AMD could also opt to sell its X86-64 patents to a hostile party today, leaving Intel forced to negotiate with a much stronger, better capitalized fiend.
This, I believe, would lead Intel to preemptively buy the relevant X86-64 patents off of AMD for a tidy sum (while allowing AMD access to them) in order to prevent such a catastrophe in the case of AMD's bankruptcy or desperation. AMD could likely extract enough cash from Intel to significantly pay-down debt, and then restructure itself as a semi-custom ARM (ARMH) system-on-chip vendor with the Sea Micro fabric for micro-servers, the graphics division for a wide variety of uses, and the right to leverage both ARM and X86 designs for semi-custom embedded solutions. AMD's currently broadcasted vision would be, in this case, free to happen without capital constraints.
Such an announcement would likely be a very positive catalyst to AMD's shares and could very likely lead to an over-night gap-up to significantly higher levels.
How About A Non-Patent Rebound?
The difference between AMD and Nokia in terms of where they operate is huge. If Nokia develops a hit product, its fortunes could reverse overnight. It has to win over the hearts and wallets of customers, but such a hit could very well happen as a smartphone's success is more about qualitative measures and less about quantitative ones.
AMD is a semiconductor designer - a chip supplier. The system vendors are going to pick the best and cheapest solution for their products. The better mouse-trap generally wins, and right now - in the notebook, desktop, and server spaces - that's Intel. While AMD cuts back R&D, lays off staff, and is now reportedly "exploring options," Intel is busy ramping its R&D spending to new highs. While much of that R&D is spent on processors for notebook, desktop and server processors as well as semiconductor manufacturing technology, Intel is also aggressively developing its next generation low power CPU line as well as communications technology (baseband, integrated Wi-Fi radios, and other neat stuff).
In short, Intel is gunning to own the entire spectrum of computing.
AMD, on the other hand, is looking to carve out as many small niches for itself as it can. It is seeing success in game consoles thanks to its strong graphics products, and the firm recently began offering embedded, low-power versions of its APUs. In addition, AMD is targeting low power, low cost notebooks, netbooks, and tablets with its next generation "Jaguar" core and various SoCs built around that technology. According to CEO Rory Read on the most recent conference call, the next generation low power 28nm APU code-named "Kabini" is already working and "on track to launch in the first half of next year." This, I believe, along with derivative SoCs such as "Temash" for tablets, could be enough to revitalize the company.
I believe that with proper downsizing, along with a razor sharp focus on a few profitable and "easier" niches, AMD can reverse its fortunes independently of a cash infusion due to patent licensing/sale. It will be tough, but AMD has surprised in the past.
Conclusion - Not So Obvious, But Still Possible
While in hindsight, there were a number of quantitative factors that investors could have spotted to confidently buy shares of Nokia, things are trickier with AMD. The financial position is worse, the industries are fundamentally different, and cost-cutting causes a lot more long-term bleeding. However, AMD's CEO seems to be working with what he has and is trying to play in the spaces that the giant Intel is ignoring. With OpEx significantly reduced and focus on fewer, more meaningful products, AMD could organically dramatically improve its fortunes.
AMD also has its X86-64 patents to try to sale/license in the very worst case.
Finally, AMD is owned by a very cash-rich operation. It is very possible that Mubadala development company infuses AMD with cash in order to protect its investment, even if it comes at the expense of dilution to current shareholders.
Folks, this is a gamble, but it could pay off big. Don't bet the house. However, if you have an appetite for risk and big gains and can afford to lose, then a number of "surprise" catalysts could seriously supercharge a speculative bet in this beaten down semiconductor company.