Seeking Alpha
Recommended for you:
Profile| Send Message|
( followers)  

Advanced Micro Devices (NYSE:AMD) has been one of the most heavily shorted stocks of 2012, losing almost 55% of its value to end at $2.41 from as high as $5.5 at the beginning of 2012. Surprisingly, the stock has broken the downtrend and has advanced 10.41% since the advent of 2013. Examining the reasons behind the sudden change in the direction, I ask myself - is it a change in fundamentals, a short-recovery or just a dead cat bounce?

Business Overview

Advanced Micro Devices is a global semiconductor major with facilities across continents. Within the global semiconductor industry, it offers x86 microprocessors, as standalone devices or as incorporated as an accelerated processing unit, for the commercial and consumer markets, embedded microprocessors for commercial client and consumer markets and chipsets for desktop and mobile devices, including mobile personal computers (PCs), and tablets, professional workstations and servers, and graphics, video and multimedia products for desktop and mobile devices, including mobile PCs and tablets, home media PCs and professional workstations, servers and technology for game consoles. The company operates in two segments.

The Computing Solutions segment, which includes microprocessors, chipsets, embedded graphics processing units (GPUs) and related revenue. This business unit generates nearly 75% of the total revenues which come up to nearly $5.343 billion for 2012, and has an operating margin of around 9%.

The Graphics segment includes graphics, video and multimedia products and related revenue, as well as revenue from development and sale of game console systems. It generates the remaining 25% of total revenues of $1.78 billion with a similar operating margin.

Investment Rationale

  • Cheap Valuations

The price to sales (P/S) ratio for AMD is at a paltry 0.31, compared to an industry average of 1.67.

The stock is trading at a price to book value (P/B) ratio of 1.88, compared to an industry average of 3.65.

  • Positive cash flows

Despite the operating loss in the previous fiscal, AMD has positive cash flows of $1.83/share, which shows the resilience of the company's operations.

  • Insider ownership

The insider ownership of AMD's stock and associated stock options have gone up by almost 88% over the past year, representing an increase in insider interest in the company.

  • Operating loss in 2012 due to one-time charge

Operating loss of $774 million in the first six months of 2012 included a $703 million charge related to the limited waiver of exclusivity from GF and a host of similar charges.

Strengths

The company has an enviable patent portfolio which was valued to be worth $2.2 billion. The company's patent portfolio spans the wide array of computing technologies, graphics and other multimedia products.

Investment Risks

  • Low EPS growth rate

The consensus growth rate estimates for the next 5 years is expected to be 6%, compared to an Industry average of 14.25%.

  • Decline in PC sales

Lower than expected desktop processor unit sales to distributor customers (PC makers), primarily in China and Europe. The US PC sales declined by 14% in 2012 from 70.8 million devices to 61 million devices, thus directly affecting the AMD's sales negatively.

  • Inability to enter tablet markets

The tablet markets is the forte of NVIDIA Corporation (NYSE:NVDA) and ARM Holdings (NYSE:ARMH), and AMD has found it difficult to crack open the high growth tablet chip market.

  • Zero Dividend
  • Increase in inventory

There has been an inventory pile-up due to lower than expected sales during the past 3 quarters.

Competitive Environment

Intel Corporation (NASDAQ:INTC) was supposed to be the Goliath to AMD's David just a few years ago. AMD was expected to eat into Intel's market share and pose a worthy challenger to Intel, but since then Intel has leapfrogged ahead beyond AMD's reach. Intel is currently trading at a P/E of 9.6 and a P/S of 2. Intel has a net income of $11.9 billion with a net income margin of nearly 20%, making it one of the most profitable companies in the technology domain.

NVIDIA Corporation is another firm that has adapted rapidly to changing market dynamics, and is shifting its focus towards mobile and tablet markets. Owing to the higher growth rates, NVIDIA is currently trading at a P/E multiple of 15, and a P/S multiple of 1.85. Even NVIDIA has a higher than average net income margin of nearly 13%.

Recommendation

The consensus recommendation for the stock is HOLD. Considering all the investment risks, the strengths, and the relatively scarce growth opportunities, the author feels the apt recommendation to be UNDERPERFORM. It can also be reasonably concluded that in the absence of any fundamental changes in the company, the recent rise should be an example of dead cat bounce, before the stock continues to head south further.

Source: Advanced Micro Devices: Dead Cat Bounce?