Buy AMD Ahead Of Earnings

Jul.14.14 | About: Advanced Micro (AMD)

Summary

AMD is no longer a speculative trade.

Strong PC shipment numbers support second quarter results.

Graphic cards, consoles and processor chips in focus.

When IDC said that PC shipment declines were slowing, only Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) foretold this better outlook. Advanced Micro Devices (NYSE:AMD) is still the underdog that has to prove itself. Yet, the smaller than expected quarterly shipment drop should prove most beneficial for AMD. Though AMD will be relying less and less on the PC market, it is still a major chip supplier for PC builders like Hewlett Packard (NYSE:HPQ) in the budget range. When AMD reports results on July 17, 2014, after the market closes, the stock could continue its climb upwards.

Chip war with Intel over

AMD is not seen as a major threat for Intel. Intel supplies most of the range of computing options offered from Lenovo and Dell. Both vendors experienced a 15.1% and 13.2% growth in shipments, which would already explain why Intel's shares are at a yearly high.

Top 5 Vendors, Worldwide PC Shipments, Second Quarter 2014 (Preliminary) (Shipments are in thousands of units)

Vendor

2Q14 Shipments

2Q14 Market Share

2Q13 Shipments

2Q13 Market Share

2Q14/2Q13 Growth

1. Lenovo

14,563

19.6%

12,648

16.7%

15.1%

2. HP

13,644

18.3%

12,377

16.4%

10.2%

3. Dell

10,448

14.0%

9,230

12.2%

13.2%

4. Acer Group

6,120

8.2%

6,273

8.3%

-2.5%

5. ASUS

4,614

6.2%

4,466

5.9%

3.3%

Others

24,974

33.6%

30,661

40.5%

-18.5%

All Vendors

74,362

100.0%

75,656

100.0%

-1.7%

Click to enlarge

Source: IDC Worldwide Quarterly PC Tracker, July 9, 2014

Intel also rewards its shareholders with a 2.88% dividend, but AMD does not.

Support for Windows XP ended

Microsoft's support for Windows XP also ended. Users determined not to use Windows 8 are opting for Google's (NASDAQ:GOOG) Chromebook or Apple's (NASDAQ:AAPL) iPad for their computing needs. In April 2015, Microsoft will release Windows 9. The operating system will be device-aware, which means users may optionally disable the Metro interface on the desktop and have it enabled on touch based tablets. The update will also bring back the familiar "Start" button, easing the transition for users from Windows XP. Since demand for tablets made by Samsung is weakening, traditional PC solutions may sustain stronger momentum ahead of the Windows 9 release.

Short squeeze possible

Between June 13th and June 30th, 2014, short interest increased by 2.5 percent to 111.70 million shares. With days to cover dropping by over two days, a strong outlook from AMD could put a squeeze on bearish investors:

Settlement Date

Short Interest

Average Daily Share Volume

Days To Cover

6/30/2014

111,697,555

24,851,459

4.494608

6/13/2014

108,959,521

15,816,995

6.888762

5/30/2014

103,812,988

12,423,223

8.356365

Click to enlarge

Source: Nasdaq

Recommendations neutral:

The majority of analysts have a "hold" rating on AMD stock, though coverage was tilted on the negative more recently. AMD was downgraded last month from Pac Crest to "Underperform."

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

5

4

4

5

Buy

3

2

2

2

Hold

15

15

15

13

Underperform

4

4

4

4

Sell

2

2

2

2

Click to enlarge

Data Source: Thomson/First Call

Conversely, this author remains bullish on AMD ahead of quarterly results:

Click to enlarge

Source: TipRanks

Earnings

Analysts expect AMD to earn a profit of $0.02 per share on revenue of $1.44 billion. The highest revenue estimate is only $1.45 billion. AMD should meet revenue targets, while financing costs should fall over the long term. Bond holders tendered $145.1 million of 8.125% notes, which AMD purchased using its 7.00% Senior Notes due in 2024. This was at a cost of $50 million.

Earnings Est

Current Qtr.

Next Qtr.

Current Year

Next Year

14-Jun

14-Sep

14-Dec

15-Dec

Avg. Estimate

0.02

0.07

0.19

0.22

No. of Analysts

24

24

26

26

Low Estimate

-0.01

-0.01

0.08

-0.28

High Estimate

0.04

0.18

0.48

0.65

Year Ago EPS

-0.09

0.04

-0.11

0.19

Click to enlarge

The reorganization, which merges AMD's Global Business Units with its Sales and Operations unit, should result in better execution of sales in growing markets. AMD will naturally benefit from strong PC demand, but the firm is shifting its focus toward the semi-custom and embedded markets. AMD's success in supplying solutions for all three game consoles proves the chip maker is more than just a PC supplier.

Strong Graphics sales

AMD's Graphics card sales should improve, thanks to competitive pricing and solid performance. Nvidia (NASDAQ:NVDA) released GeForce GT 730 and GT 740 cards, but they were just re-badged versions of existing cards. With the refresh, AMD's R7 cards have the better price to performance for consumers. On the high-end, AMD's R9 line-up is still more competitively positioned than Nvidia's offering.

Bottom Line

AMD was, for many quarters, a trading stock. This meant higher volatility to its share price and dips to the low $3 range. This time around, chances are good that AMD will boost its outlook. Budget PCs, led by the "Kaveri" chipset, are set to grow while the revenue forecast from consoles should move up conservatively.

Disclosure: The author is long AMD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.