There has been quite a bit of speculation lately regarding Advanced Micro Devices (AMD), especially surrounding Wednesday's announcement from Sony (SNE) about the new PlayStation 4. The purpose of this article is to shed some light how this might play out.
To get it out of the way, I will state my outlook is bearish overall and I would not recommend it to anyone. However, I'd like to provide a balanced view, so I will get the case for the bulls out of the way now. There are only two encouraging things about the stock in my opinion.
1. Initiating a new position at current levels means you have a max downside risk of less than $3 per share, with potential for substantial upside % gains, should the tides ever turn.
2. The announcement of Sony's PS4 using chips is the first major deal in as long as I can remember for this company. This could signal that management is finally making headway in penetrating new market share.
Now to the points above, #1 is highly speculative and a pure price action play, which I do not recommend. #2 is a positive sign, but also a first step and it will take some time to see if management can repeat the results. Before we go further, I want to lay some background. Advanced Micro Devices has performed terribly in terms of stock price and company results over the last year. The stock saw a peak of $9.45 almost 2 years ago in February 2011. Since that time, it has fallen to new lows hitting $1.81 in November 2012. Below is an earnings timetable.
Advanced Micro is now coming off two quarters of losses that erased the gains picked up earlier in 2012 reporting total losses of $0.16 per share for the 2012 year. This is attributed to multiple reasons including slowing sales, loss of market share to competition, shortfalls in management, and slower PC sales which was a major core of the business. Ultimately, this has slowed and in some cases reversed growth in the company's fundamentals taking the stock all the way under $2 per share. The stock has since recovered off its lows, but there has not been any major fundamental shifts that would warrant a higher price.
However, the recent rise off the lows, and the announcement of the chip maker's products being used in Sony's PS4, could give the stock a boost on speculation. This could present a good short opportunity. Here is why. Recently, we saw a major technical confirmation signaling a possible reversal to the upside. See the chart below showing a head & shoulders bottom on February 19th.
There are two important things to notice here. I believe this is a false signal as you will notice the slant to downside of the neckline, and the point at which it broke the neckline where no significant spike in volume occurred. This tells us that the run-up from here, if any, is a false flag and should be short-lived.
This signal present a timely opportunity as I believe any run-up will be caused solely by speculation and I would look to short the stock on the inflated price for another dip to the downside. There is also a fundamental argument to give support to the shorts. Let's take a quick look at liabilities from Advanced Micro Devices balance sheet.
AMD Annual Long-Term Debt In Millions
|Total Long-Term Debt||$4,252||$2,158||$1,501||$2,037|
What these numbers tell me is, can be tied closely to its long-term debt. Relative to market share and sales at the time, debt in 2010 was almost half that of 2009 and the stock was over $10. 2011 debt reduced even further and stock was still over $9 even as sales slowed. The last part of 2011 and all of 2012, as sales continued to decline, added $536 million in total long-term debt obligations. What this would indicate is any increase in revenue or sales in coming quarters from the PS4 or other devices is going to be offset by the addition of that long-term debt, and thus will not translate into any significant earnings increases.
With that being said, it's clear management has ways to go before it begins to turn around for the long haul. My recommendation is to sell the hype in the near future. I will be looking to see if we get the false run-up as indicated by the head and shoulders bottom which timed in line with the PS4 announcement. If that happens, I would suggest that bulls take their profits and bears initiate a short, as the price should continue to decline despite any quick pops in coming months.