Investors in Advanced Micro Devices (NYSE:AMD) have watched sales slip and profit margins contract in recent quarters. Disappointing performance has led investors to slash the stock price back to ten-year lows near $2.50 per share. Such a nominal price is so very tempting! Then again that two-inch square brownie I ate last week was 'so very tempting' and now it just seems clumped in reproach on my thighs.
Is AMD a 'buy' or a 'brownie?'
First, let's look at why AMD is at a bargain basement price. In the last reported year, sales shrank by 17% to $5.4 billion and the profit margin came in at a paltry 22.2% compared to 43.9% in the previous year. Even removing one-time direct charges in both years, the gross margin declined in 2012 to 41% compared to 45% in 2011. Consequently, the company reported an operating loss for the second year in a row. Of greater concern is that over the last five year AMD operations have used a net $587 million in cash. Taking into consideration capital expenditures, the company used $2.2 billion in cash over those five years.
Considering that AMD held $1.0 billion in cash on its balance sheet at the end of 2012, there is no worry of insolvency or even a crimp in working capital. Still cash and consequently total assets have been shrinking. So it came as no surprise to anyone when management proposed the sale and leaseback of its Austin Campus in Texas. After the pony up of fees for the deal, AMD will put about $165 million into the bank. This helps make up for the $281 million AMD used last year to buy SeaMicro, a producer of energy-efficient micro-servers. I will return to SeaMicro in a moment.
At the end of 2012, AMD reported owning facilities around the world totaling 2.4 million square feet. Although AMD provides no details on individual plants or value, total value of property, plant and equipment was $658 million at the end of 2012. The company could potentially repeat the exercise with other facilities, padding its cash balances while retaining access to facilities. Tinkering with property, plant and equipment seems more like a diversionary tactic than a legitimate strategy to deliver value to shareholders.
Thus to take a position relative to AMD requires a look at the company's product pipeline, which extends across a wide array of microprocessors for computers, servers and mobile devices. AMD spends about $1.5 billion per year on research and development, making it possible for the company to introduce a string of product line extensions in recent years. Unfortunately, none of those products set AMD apart from its arch nemesis, Intel (NASDAQ:INTC) or even other semiconductor producers for that matter.
AMD may be close to shaking it 'also ran' reputation. In October 2012, management announced their intention to focus on the development of a server processor based on 64-bit ARM technology (Advanced RISC Machine) licensed from ARM Holdings. ARM processors require fewer transistors than other microprocessors and therefore cost less and consume less power. With these characteristics it is no surprise that nearly all smartphones and a growing number of mobile devices rely on ARM processors. The energy saving 64-bit ARM architecture could be particularly advantageous for servers.
AMD's first ARM device will be a system-on-a-chip for servers and will integrate the SeaMicro supercomputing 'fabric.' It could be among the first 64-bit ARM devices on the market, propelling AMD into an elite segment of semiconductor market. At least that is the hope of investors who are long AMD shares.
Those hopes may have already been doused with cold water. In November 2012, at ARM Holding's technology event Dell, Inc. (NASDAQ:DELL) displayed a 64-bit ARM server using a chip from Applied Micro Circuits (NASDAQ:AMCC). Back then Dell was coy about the test, saying Dell had no concrete plans for such a server product. However, in just weeks Dell's 64-bit ARM-based server had been named Dell Iron and was ready for display at the Open Compute Summit in January 2013.
With clear competition from Dell for this server product, it is more likely than not investors will take a wait and see attitude toward AMD. Real revenue and not just talk will be needed to trigger an upward valuation of AMD shares. The ARM chipset is expected to be launched in 2014 in the Opteron chip family. It could begin contributing to revenue in that year.
That is a long time to wait for results, but at the nominal price of $2.50 per share patient investors might think they afford to wait. I am not so sanguine. A review of historic trading patterns suggests there very little if any upward momentum in AMD's stock price even with news of the company's future product plans. Thus as compelling the current low price might be for AMD, it makes little sense to tie up capital in a stock with little near-term momentum and a valuation catalyst that will take over year to develop.
You might be better off buying a brownie than AMD - it costs about the same and at least you will have some momentary pleasure.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.