Plenty of Upside for AMD?

“We’re looking at a tale of two chip makers. Advanced Micro poised to get an even bigger chunk of Intel’s chip business. Citi upgrading AMD to a buy from a hold saying the semi-maker could steal even more share in the future. Barron’s agreeing wholeheartedly with that thesis. Already AMD’s won key contracts from its main customer, PC-maker Hewlett-Packard. In fact, HP recently canceled some of its programs with AMD’s arch-nemesis Intel. Meanwhile, Citi doesn’t think AMD can unseat Intel for the number one spot just yet. The firm does see room for stabilization there.” — CNBC’s Closing Bell 8/24/2009

Advanced Micro Devices (AMD) received an upgrade Monday from Citi, and the stock soared up more than 8%. The stock had been pummeled over the past couple of years because of continual quarterly losses, and there are still concerns over the substantial debt load. However, according to the analyst Glen Yeung at Citi the stock could be a steal at this level, and he has raised his price target to $5.50 from $4.25 and now has a “Buy” on the shares.

The catalyst for the upgrade is that he sees AMD beginning to take a larger market share from rival Intel (INTC). He also sees gross margins improving from their 2Q levels, and thinks that the consensus estimates are overstating the losses for the second half. More than anything, Yeung sees a favorable risk to reward in this stock, because it is currently trading at only 1.25x EV/sales, which is just over half of the semiconductor industry average.

For our analysis, we are still neutral on AMD shares at this point with a Fairly Valued stance. While we do see a good bit of potential price appreciation for AMD, there are still nagging concerns. First, the valuation is a positive, we would expect AMD to be priced around $5.52 in order for it to trade for the average of the hi and low range of price-to-sales and price-to-cash earnings that it has historically traded for over the past ten years. Coincidentally, that is just about the same level as Yeung’s price target. However, at present the are just too many red flags for this to be a buy according to our methodology. For starters, the balance sheet is far too debt burdened and actually has negative shareholder equity. Shareholder equity has been in a steady decline and turned negative two quarters ago. Also, it is especially troubling for a company to have this much debt when it is not able to turn a profit. 10 of the last 11 quarters AMD has shown a loss, a problem that consensus estimates suggest will continue through the second half of 2009 and into 2010.

So, even though AMD may be starting to turn a corner, it is not a stock that we would consider recommending. Shares are cheap historically speaking, but to buy into this stock would mean investing in a company that is not profitable and has a low quality balance sheet. In this case, there may be upside potential for the taking but we would prefer to leave it on the table and put resources to work with companies of better financial strength.

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Comments

[BullnBear:]

Intel needs AMD more than anyone seems to realize.

Intel will continue to be seen as a monopoly and will continue to attract legal suspicion until such time as they are no longer seen as the only game in town.

What that will do to the bottom line is anybody’s guess but it would sure help from a legal perspective.

Aug 25 01:34 AM

[prairiedog555:]

AMD is a better product. Their chipset is superior.

Aug 25 05:55 AM

[Idiotbuster:]

AMD saves consumers money when buying any computer because Intel had been slashing prices for its chips. We need AMD to be profitable in order to survive so we can continue to enjoy affordable computers. If we avoid buying AMD shares simply because it is not profitable, so what is the point after all??

Aug 25 12:35 PM

[Idiotbuster:]

AMD bought ATI Graphics a few years ago for $5 billion and got deeper into debt. Why? To give us better chips with powerful graphics capabilities against what Intel got to offer.. We will enjoy great computers with AMD inside... instead of Intel inside...

Aug 25 12:39 PM

[Idiotbuster:]

Apple is stupid for not using AMD chips yet... Soon enough, Apple will..

Aug 25 12:41 PM

[Idiotbuster:]

Apple is stupid for not using AMD chips yet... Soon enough, Apple will..

Aug 25 12:41 PM

[principle:]

Intel, because of AMD, has had to make better products than the crap they used to sell everyone at extremely inflated pricing. So Intel has good cpu products now, but they had to catch up to AMD. Why people dont recognize this is a wonder to me. Intel is very shifty, they should take responsibility for thier illegal activity, but because they are back on the top of performance, they make it seem like they were chosen for technological superiority and not just the rebates. Well they had to force people not to sell AMD because AMD was technologically superior at that time, but the community at large has short memories, and the blogging generation never bought a POS PI, PII or P4 for $3K with crappy performance. Now I had a late model PIII and an Athlon that outperformed the P4s. Since then it has been Athlons all the way.

Aug 26 01:18 AM