Advanced Micro Devices: Caveat Emptor

| About: Advanced Micro (AMD)

Advanced Micro Devices, Inc. (NYSE:AMD) is a global producer of semiconductors. Its premier products are microprocessors and chipsets for servers, mobile, and desktop computers. It is the second largest producer of PC microprocessors. AMD operates in a competitive sector with significant competition, such as Intel Corporation (NASDAQ:INTC), Imagination (OTC:OTCPK:IGNMF), Nvidia Corporation (NASDAQ:NVDA) and ARM Ltd. (NASDAQ:ARMH). The company has facilities in a plethora of countries.

On October 24, 2013, AMD launched its Radeon R9 290X graphics card which provides the premier GPU on the market for PC gaming. Should this technology prove to actually provide the best graphics solutions for gamers then AMD will secure very lucrative contracts in the short and long term. Game developers have been anticipating the release of the Radeon graphics card as it has been widely touted as a potential 'game changer,' pun intended. If it delivers on the hype then the AMD stock will likely benefit. AMD also touts an accelerated processing unit that unites the company's GPU and CPU technologies together into a single silicon piece. The APU improves security, performance and visual aesthetics. This technology is applicable to operating systems like Microsoft (NASDAQ:MSFT) Windows, Linux, UNIX, Netware and Solaris.

In the third quarter of 2013, AMD reported surprisingly profitable earnings. After significant restructuring and a jump in gaming console chip sales, the company produced a net profit. This was the first net profit for AMD since the third quarter of 2012. The company's sales had been sluggish in the PC sector so the boost in the gaming realm is much appreciated. AMD has transitioned its focus from the declining PC market to the booming gaming console market. This is quickly becoming a successful turnaround strategy.

The third quarter revenue increased 26% from a quarter-over-quarter basis and 15% from a year-over-year basis. A net profit of $48 million was earned. This is quite a rebound as the company suffered a loss of $150 million in 2012. The third quarter results show revenue of $1.46 billion, which is a 26 percent sequential increase and a 15 percent increase year over year. The gross margin is 36 percent. An operating income of $95 million was reported with a non-GAAP operating income of $78 million. AMD had a net income of $48 million with earnings per share at $0.06 as well as a non-GAAP net income of $31 million with earnings per share of $0.04.

Even though the recent financial results were mostly positive, AMD's stock price dropped significantly due to a slowing PC demand. AMD's competitors are eating up a larger piece of the PC processor and graphics pies. Nvidia and Intel have been the primary winners in these markets. There is less competition in the cheap notebook and tablet market but this will soon change as Intel is releasing a highly anticipated Bay Trail processor for mobile devices.

As of October 30, 2013, AMD's current share price is around $3.30. This is well above the stock's one-year low of $1.81 yet far below the one-year high of $4.6. AMD's 50-day moving average is $3.78 while the 200-day moving average is $3.69. The stock has been hit by a wave of negative publicity from respected analysts. AMD was recently downgraded by analysts at Sanford C. Bernstein to the 'underperform' category. Analysts at Merrill Lynch have reduced the price target for the stock to $4.50. Their target previously stood at a gaudy $6.00. Deutsche Bank's analysts have the stock labeled as a 'hold' and bestowed it with a $4.00 price target. Even worse, analysts at Goldman Sachs Group recently confirmed their 'sell' categorization for the stock.

In totality, there is a consensus rating of 'hold' and an average price target of $4.51. The experts have a diversity of opinions on the company's future. Ten analysts have AMD categorized as a 'hold' rating, seven give it a "sell" rating and nine categorize it as a 'buy.' Therefore, the general sentiment towards AMD is 'caveat emptor' or 'buyer beware.'

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.