If there is one thing I have learned about the market these days, it is that there is no way to predict a stock price based on facts.
Last quarter I witnessed Advanced Micro Devices (AMD) make a solid earnings report, and watched it get downgraded. Twice. After carefully reviewing the call and all other facts involved, I wrote an article on the matter that summed up what I found.
When I witnessed the same thing this quarter, I could not believe what I was looking at. Then after reading some comments - I came to realize that it doesn't matter what the facts are - but only what people want to believe. This of course is very damaging when you take into account that the majority of investors nearly always follow the big money and major media outlets. It is in response to all that I submit my retort.
Here were the main reasons given as to why the stock took a hit, addressed point by point:
- The company has so much debt.
- Can it sustain the current outlook?
- It didn't meet analyst expectations.
- Its competitors are safer and pay dividends.
- It has a bad track-record.
1. Yes, AMD does have a sizeable amount of debt, its largest being to Global Foundries - the company who used to make the AMD chips. AMD decided to use other foundries to make their chips as well (GLOFLO was not able to produce what AMD was looking for), but because of the exclusive contract with GLOFLO, they couldn't. So they reached an agreement with GLOFLO to pay x amount over several years to enable them to use other foundries. The Motley Fool was especially critical of AMD's debt (as was others), yet they failed to tell the whole story, and that it is not new.
To be frank, this is not by any means a new problem, and has been going on for well over 18 months. Those listing it as a reason to down-grade the stock later were silent when AMD went from the 2.20 range to a 4.60 range in about a month's time. They said nothing. When Q2 earning was released, it suddenly became a big deal, and the stock price took a major beating down to around 3.86 a share. It was one of the big reasons listed as to why the stock was then downgraded.
Then came the Q3 ER, and the stock did very well. The debt issue was discussed in great lengths in the earnings call, and it was made abundantly clear that it was far less of an issue then it once was as revenues went higher than expected. In short - there is no reason here for the stock price to get hammered like it was. Especially not for an issue that has been in the works for a long time - and has been meant each time.
2. The largest single money makers for AMD at the moment are their server wins (at least Verizon - the only one they could name at the time, most likely due to confidentiality agreements), and their game console wins. This too is found in their Q3 earnings release ("ER"). These are not only current revenue sources, but ones that will exist for a long time to come. Part of AMD's strategy was to offset the losses from OEM sales and gain new sources of much needed revenue; and to renew their bull-dozer tarnished name. This was one of the steps in that strategy, and in the earnings call, it spoke for itself. It effectively made the Q2 downgrades by Morgan Stanley and Credit Suisse completely unfounded. No surprise there.
Now comparing an Intel chip to an AMD chip is like comparing apples and oranges (pardon the cliché). People like to compare the two in forums all the time as to whose is better. The truth is that each one has their strengths and weakness. Up to this point in time, Intel has ruled supreme due to its hyper-threaded/single-thread performance (as that is where the bulk of the current software was written to use), and lower power-consumption. In such applications, AMD had a very difficult time because not to many software vendors made products that favored their multi-threaded approach. In addition the AMD chips would use far more power than most Intel chips. The truth is that outside of a server farm, no one would really notice much difference; in home use, the difference was mostly negligible. Still, those reasons are what gave Intel the hard advantage.
This meant that AMD's loss of PC sales at the time was a hard hitter. So as another part of their strategy, AMD focused on several things. 1 - Making their chips more power efficient (which has been going very well). 2 - Working with software companies to better leverage their multi-core approach to close the gap in performance compared to Intel. 3 - Re-designing their chip architecture to handle single-threaded applications better than in the past. This particular strategy has already paid off in terms of Desktop sales - though their Laptop sales have lowered (the details of this are found in AMD's quarterly earnings ("QE") 3 ER in the earlier link). This is mainly because of Intel's power saving reputation, and OEM's going with them.
Due to recent market wins however, I believe Laptop OEM's will start taking more notice of AMD. Of course if it doesn't, then you have their Desktop side. In early Q3 they released their Richland chips, and the chips were met with great enthusiasm as shown in sales number and comments made on retail sites (like NewEgg, TigerDirect, etc). The key here is that in most of these strings - the common comment was 'bought a cheaper chip - holding out for the Kaveri chips'. In short - if AMD's Richland chips are doing this well now - Kaveri will be meant with even more enthusiasm which translates into more sales. So I believe this will ensure at least 2 more profitable quarters (Kaveri comes out late this year).
3. The claim that AMD did not meet analysts' expectations has only 1 sliver of truth in it - and that is the fact the 'PC sales' were lower than expected. Of course this is all anyone who doubts AMD cares to hear, and they overlooked the rest of the conference call - as well as just about every PC enthusiast site out there. Still, outside of overall PC sales - AMD exceeded what was expected.
AMD stated on their call that even though the PC sales as a whole was lower than expected, the loss in sales from laptops was partially offset by the increase of sales in Desktops. Being that the Richland has headed the charge in the Desktop department (best value for your dollar - in today's ailing economy, it is a much needed breath of air), this is a sign that AMD has found its mark. Being that Kaveri is what buyers are truly wanting adds even more expectations to future sales. Simply put, I expect to see a spike in Desktop sales when Kaveri is released.
Outside of that, AMD outperformed expectations in every other aspect for an over-all great quarter. So the idea that it missed expectations would mean that the investor who believes that is either unable to read, or is deliberately ignoring the facts as stated.
4. Intel (INTC) is the nemesis of AMD pure and simple. Graphics wise, AMD and NVIDIA (NVDA) have always been on a level field, and I see no reason to even address that as it lacks the ability to derail AMD as Intel has the potential to do.
For starters, AMD's PC future revolves around the success of HUMA, HSA, MANTLE and the like. If none of these take off, then AMD's future on the PC world will be mediocre at best. While this will not be a deal breaker for AMD, it would be a fairly serious hit. Especially as so many so called 'analysts' seem to think it is AMD's main revenue source at this point, despite clear proof to the contrary.
So due to bad press written largely by people who do not read the full-Monty (and the army of shorts they command who care little to research themselves), AMD has proven to be a highly volatile stock moving up and down at a rate if 8%+ week over week in many cases. Due to this imbalance, Intel and NVDA are the mainstream investors stocks of choice - they rarely fluctuate enough to present an issue, and they pay dividends.
This is the sole reason I can think of why AMD is so volatile. The longs are set up in 'safer' dividend paying stocks, whereas AMD is still largely viewed as a bench-warmer. Another SA author pointed out that it doesn't matter what I believe or what he believes - unless the Market as a whole chooses to actually research, and invest accordingly - then AMD has nowhere to go until the veil is completely lifted.
5. Until fairly recently, AMD did have a horrible track record. Not just in hardware, but management as well.
On the hardware side it let go of its glory Athlon days, and introduced what they touted to be the next generation of CPU's = the bulldozer.
To be fair, the bulldozer was not meant to be the final result of the greatest chip ever invented. It was supposed to be the first among a new architecture of chips that would grow into a formidable line up. The problem came when AMD announced it as this huge thing that would be the best thing for PC enthusiasts everywhere as opposed to the stepping stone that it really was. Just to gain sales - it backfired miserably.
The initial release of bulldozer saw record sales. Everyone bought it with great expectations. When it failed to deliver time and time again, word of mouth went out and AMD became one of the most cursed names I have ever seen in a forum. Intel took advantage and before you know it - AMD was bottomed.
Since then, the question was asked as to why the new chips like Kaveri will be any different. Why should PC consumers trust AMD again after the bulldozer debacle?
The answer lies in the new design teams behind the Kaveri chips that are comprised of well known, high level designers that have rock solid reputations, and proven abilities. Add an all-star management team (Jim Keller, Raja Kodiri, Lisa Su, John Gustafson, Mark Papermaster etc.), and you have a company that is ready, willing, and able to put their money where their mouth is. The short version is a complete change of management and technical staff that have the know-how, and the persistence.
Given all this (and the points above) I can say with solid conviction that AMD is not only on the right track, but catching up faster than anyone expected.
There never was a reason why AMD to have such a rapid loss of stock price this QE (much less last one). The few concerns made that were founded had been known for years now, and as such are no reason for the knee-jerk responses we have seen after the last two QE reports. Furthermore, most of the sites still downplaying AMD said earlier "If AMD turns a profit in QE3, it will prove to investors that they are worth buying into". Challenge accepted and meant, so now they are making every other excuse under the sun why not to buy into AMD. Many of the reasons listed are regurgitated from over 2 quarters ago. It is time to move on.
The main risks here are what if HUMA, HSA and, MANTLE fails; Kaveri does not deliver, and Verizon has major issues with the Sea-Micro servers - then AMD will most likely fall for good.
Yet Verizon (VZ) and the other deals cannot fail for some time though - meaning that the risk is low of those revenue sources drying up. The game console wins for SONY (SNE) and Microsoft (MSFT) are at an even lower risk of drying up. The chance of Kaveri being disappointing is slim at this point as a new design and management team have worked round the clock to make it work. If it is even close to as good as is being touted - then it will be enough to give them the sales boost they need in the Desktop market. Given all this, AMD will continue to be profitable for many more quarters to come.
Finally we have the HUMA, HSA, and MANTLE angle. These are the things that will make all the difference in the world between AMD being merely profitable over the next few years, and downright stellar. Being that these things are what AMD architecture is designed to handle best, it will be a complete game changer if they go mainstream. The reason being that it would give AMD the much needed advantage over Intel that they currently lack. This would mean even greater revenue in PS sales.
It is for these reasons that I believe AMD to be greatly under-valued.
If you want more details on any of things discussed in this article in regards to AMD's revenue sources, they have all been addressed by both AMD in their QE reports, and by a multitude of other SA writers who have done quite a bit of due diligence themselves. If you want more opinionated and less researched based articles on AMD, feel free to visit Bloomberg or The Motley Fool - if for no other reason than to get a better feel for the broader scope of what is being accepted as truth on the world of investing.