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Summary

  • I'm not ready to buy yet another AMD "turnaround" story.
  • Although the year-over-year revenue growth has been strong, this speaks more to where the company's comps have been.
  • Without revenue materially impacting profits, there is no point to a bullish argument.

Second only to Intel (NASDAQ:INTC), Advanced Micro Devices (NYSE:AMD) has been a dominant producer of microprocessors, GPUs and chipsets over the past couple of decades. While AMD still has a strong product portfolio, which includes strength in graphics and advancements in 32nm manufacturing, AMD has dropped the ball in the realm of mobile. This, too, is a similarity with Intel.

However, unlike Intel, which has begun to make inroads in various mobile technologies, AMD is still nowhere to be found. As it stands, the company has instead placed an emphasis on the gaming industry and has ceased the growing mobile market to Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:BRCM). And I use the word "cease" out of respect. While I have always liked AMD, the stock has never made sense.

There continues to be an appeal for the cheap price. Investors want to believe that these shares can double from current value. But no one is able to explain how this is going to happen. Weakening consumer demand, macro issues, and market share losses remain a matter of concern.

Despite the claims made by AMD's management about the company's strong product line, Intel and Nvidia (NASDAQ:NVDA) remain better positioned to capture what Qualcomm and Broadcom leave behind.

All told, AMD is in no better shape today than it were, say, last year or two years ago. New tablets and mobile devices are embracing processors from Intel and Nvidia. AMD management has made some key moves to reposition the company for growth. But AMD has been in a state of perpetual restructuring.

Each year, investors are told to "wait for next year." And we've reached a point where patient investors have to assess opportunity costs and come to terms with the reality that AMD's best days are gone. And they're not coming back. On Thursday, AMD will report first-quarter earnings and management will be pressed for details about the company's direction and what growth drivers are in place to suggest that this stock can stay above $3.00.

The consensus earnings per share estimate is zero cents per share. This immediately should raise eyebrows for any investors who believe that this stock is anything other than a lottery ticket at this point. It is somewhat encouraging, nonetheless, that consensus estimates have risen over the past three months. Initially, analysts had projected a loss of one cent. For the fiscal year, analysts are projecting earnings of 13 cents per share.

Revenue, meanwhile, is projected to be $1.34 billion. AMD investors will cite this as reason for optimism. While it's true that a 23% surge in revenue will be encouraging, none of that growth has trickled to the bottom line. This is even though management has been aggressively cutting costs over the past couple of years. For the full year, analysts project revenue of $5.75 billion.

Revenue has grown the past couple of quarters, including a 46% year-over-year jump in the January quarter. But most of that was attributed to seasonal holiday sales. This goes back to my concerns about the company placing such a strong emphasis on the video-game console industry. Sales are too closely tied to unpredictable cycles.

From my vantage point, the fact that more than 30% of AMD's 2013 revenue (in the second half) came from consoles should be a concern. Video games are not high margin businesses. And with more games migrating to tablets and smartphones, AMD's playing a dangerous game of life and death, especially given the declining PC and server market.

At this point, I'm not ready to buy yet another AMD "turnaround" story. On the basis of compressing margins and long-term market share losses, I see this stock heading to $3.00 and possibly below in the next 12 to 18 months. Although the year-over-year revenue growth has been strong, this speaks more to where the company's comps have been. Without revenue materially impacting profits, there is no point to a bullish argument.

Source: Why AMD Is A Good Short To $3.00