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Summary

  • Positive momentum is building again in shares of AMD.
  • History of disappointing shareholders limits upside, but this time really is different.
  • Solid debt management, product refresh, and efficient R&D will support higher share price.

Speculative traders are locked into the notion that Advanced Micro Devices (NYSE:AMD) is a sell immediately before quarterly earnings. This is backed by a high level fundamental notion that the chip maker is heavily indebted. Bears worry about product mix. Chips are ineffective against Intel (NASDAQ:INTC) on the desktop market, and despite rising prices for AMD's graphics card ("GPU"), sales will be constrained. As AMD shares hover close to $4, a break above it could flush out bearish investors. Strong console and graphics chip sales will not be enough to support the stock. Chances are good that management will offer a brighter outlook in the next few weeks.

Waning PC market

Weaker shipments for PCs will persist for the foreseeable future, but a short-term bounce in demand is possible. Microsoft (NASDAQ:MSFT) is ending support for Windows XP. This will force users to upgrade to Windows 7 or 8. Inexpensive APU-based solutions from AMD could receive stronger demand over the next few months. Still, the main driver for AMD's growth will be in emerging markets. Consumers are very price-sensitive for computers. AMD's strategy to produce completely low-end systems will appeal to this market.

High debt

3/31/2013

6/30/2013

9/30/2013

12/31/2013

Long-Term Debt

2,039.00

2,042.00

2,044.00

1,998.00

Source: Kapitall

AMD has nearly $2 billion in debt, but has the quarterly cash flow to manage interest payments and debt maturities. More relevant to AMD's future is the efficiency in its research and development work. AMD spends proportionately less than graphics card competitor Nvidia (NASDAQ:NVDA).

3/31/2013

6/30/2013

9/30/2013

12/31/2013

Long-Term Debt

2,039.00

2,042.00

2,044.00

1,998.00

Net Sales or Revenues

1,088.00

1,161.00

1,461.00

1,589.00

Research and Development Expense

312

308

288

293

% Revenue

28.7%

26.5%

19.7%

18.4%

Source: Kapitall

Nvidia spent between 29.4% and 34.3% of R&D / Sales in each of the last four quarters:

4/30/2013

7/31/2013

10/31/2013

1/31/2014

Net Sales or Revenues

954.74

977.24

1,053.97

1,144.22

Research and Development Expense

327.16

331.73

340.29

336.65

% Revenue

34.3%

33.9%

32.3%

29.4%

Source: Kapitall

AMD's efforts are bearing fruit. It produced a chip solution for consoles, updated its CPUs, and released a GPU that competes effectively with Nvidia. AMD even released a very high-end workstation graphics card. For a unit price of $3,999, the FirePro W9100 has 16GB video RAM, a Hawaii GPU, and can handle up to six 4K monitors simultaneously.

Bottom Line

AMD's two-month old rally to $4.00 could hold. The market is not expecting a breakout year for AMD, nor should they. AMD provided a conservative outlook for the year. Crossing and breaking above $4 is the first step towards building bullishness in the stock. To sustain the momentum towards the $6 level by 2015, it will be up to AMD to report good graphics cards sales, higher than expected chip sales for consoles, and stronger unit sales for its computer chips in the budget and emerging markets.

Source: Why AMD's Breakout Above $4 Is Significant