With revenues of AMD falling 18% year-on-year in its quarter two release, it appears that investors are concerned on what matters least. Of course, operating income fell 63% on a year-on-year basis. The company's computing solutions segment revenues fell 20% year-on-year. The microprocessor sector decreased both sequentially and year-on-year.
However, AMD's computing segment revenues improved sequentially due to higher notebook server and desktop unit shipments. The segment's operating income was $2 million, compared with an operating loss of $39 million in quarter one. The company's gross margin was 40%, compared with 22% for the same period a year earlier.
Is the PC market not dying?
The personal computer market is experiencing a slow down, making many believe that AMD will undergo the pain suffered by many PC - related companies. But AMD seems to be finding a way out of the problem. The semi-custom chip business reduces a company's dependence on one market and is a low-risk revenue generation for a company. AMD is about to introduce a new class of it in the market. This offers a lot of opportunities, with Nintendo and Sony agreeing to have it in their new products. With these processors in place, developers will strive at making their games run seamlessly on AMD's hardware, increasing the market of the company's CPUs and GPUs. However, it could translate into uncertainty for investors looking to go long on AMD. Many hedge fund managers do not have this sentiment. It is possible these institutional investors have seen profitable qualities about the plan of the tech giant.
Hedge fund managers
At the end of March, the hedge fund managers invested in AMD were 25, unchanged for the same period last year. The managers invested in the company include Steven Cohen, Brian Taylor, Howard Marks, and Andrew Sandler.
However, while the company has had only two insider purchases recently, 48 insider sales have taken place since 2009. It is wise to note that insiders still retain a substantial amount of their investment in the company.
Delving into fundamentals, AMD's price-to-sales ratio signals that the company is undervalued in comparison to all its competitors. AMD's price-to-sales ratio is 0.55. Investors are valuing the price-to-sales of Intel (INTC) higher at 2.12. And the same can be said at 1.97 for IBM (IBM) and 2.06 for Nvidia (NVDA).
In addition, AMD's beta gives a similar conclusion. AMD's beta of 2.55 is below Intel (0.93), Nvidia (1.64), and IBM (0.73). Investors are also wise to look at the sentiment surrounding a company's forward P/E. As usual, AMD is grossly undervalued by this metric too, as its forward P/E of 25.71 is more expensive when looking at Nvidia (18.67), Intel (11.25), and IBM (10.04).
In the long run, AMD should be valued higher. For example, its EPS growth in the next five years is estimated at 11.50%, higher than Intel at 11.00% and IBM at 9.96%. Only Nvidia at 12.00% is higher than AMD. In addition, AMD's share price growth in the past three months has been about 70%, more favorable than 4% for Intel, -14% for IBM, and 25% for Nvidia.
Primarily focused on enterprise demand, the semiconductor industry has a bright future. In their latest research study, "Global Semiconductor Market Outlook to 2017," RNCOS' analysts estimate that the market is slated to grow at a CAGR of 7.6% between 2013 and 2017. The growth in revenues will be driven by the increased demand for smartphones and tablets. This factor will obviously help AMD, even though the company faces the problem of declining sales in personal computers.
As mentioned earlier, AMD suffered a revenue decline, but it has introduced several new client processors. In an effort to prevent sales from sliding further, the company has built the fastest desktop and notebook graphics solutions in the world. Perhaps it is due to this, Canaccord Genuity upgraded the stock from hold to buy with a price target of $5 a share. Wells Fargo maintained an Outperform rating on the stock with a price target of $5-$7. Analyst David Wong saw decreased business risk in purchasing AMD. Bofa/Merrill Lynch upgraded the company to Buy. FBR Capital also upgraded it from market perform to outperform.
After considering these factors, it does seem possible that some suspicious sentiment is surrounding AMD. Even if it suffered revenue decline, AMD expects it to rise 22% in the present quarter. In the long run, the stock will be fairly valued. Ultimately, it is up to investors to trust the fundamental analysis before making a decision on the stock.