AMD's Fortunes Rise With Llano but Risk Remains

| About: Advanced Micro (AMD)

After seeing a one-month slide of about 18%, AMD (NYSE:AMD) appears poised for a significant bounce. The company has been punished for struggling to find a CEO, but the release of the well-received Llano mobility platform positions it to deliver strong results in the back-to-school and holiday seasons.

After capturing the performance crown from Intel (NASDAQ:INTC) early in the decade, AMD lost the advantage to its competitor's R&D resources and has been playing catch-up since the release of the Core line of processors. Perhaps recognizing that it can't compete in tit-for-tat technology refreshes, AMD has chosen to pursue a dual strategy, positioning itself as the as value alternative to Intel's offerings and emphasizing that everyday computing performance results are the result of CPU/GPU interaction rather than processor workload alone, with an end-goal of combining central and graphics processing on the same die.

AMD purchased Canadian graphics technology company ATI in 2006 and has been laboring since to bring integrated solutions to the market, calling its initiative "Fusion." Five years later, the Sunnyvale company released the Brazos platform (with APUs codenamed Zacate and Ontario) for entry-level notebooks and netbooks. From the graphics angle, no Atom-based platform is close to competing and AMD claims to have sold out in Q1.

The Llano platform targets mid-range laptops and desktops, where Intel's Sandy Bridge-based Core i3/i5/i7 processors, equipped with Intel HD graphics, have been entrenched in terms of performance and power. It's a stop-gap measure to combat Intel's domination, since AMD's next-gen architecture, code-named Bulldozer, is due to arrive in bulk to the retail channel sometime next year.

The good news is that Llano has garnered largely positive reviews focused in dramatic battery life improvements and significant gains in graphics performance (Tom's Hardware U.K.):

The associated power savings of a single-chip solution are very attractive (...) We've already seen the advantage of adding graphics to AMD's low-power C and E series APUs in the netbook space. Llano will leverage the same benefit in the more performance-driven laptop market. Frankly, there's not much out there in (midprice) range with discrete-class graphics. And Intel's Sandy Bridge architecture actually does a fair job with its HD Graphics 3000 engine. But Llano blows that away in 3D workloads, using less power in the process.

The company has $1.74B in cash and $2.54B in debt, a 56% rate of institutional ownership, it has delivered EPS to or above consensus targets for the last 8 quarters but has a significant short ratio of 4.5% (Source: Yahoo Finance)

Comparing AMD's operational metrics to Intel is unfair given the latter's enormous size and market-share advantages. But in light of comparable peers [On Semiconductors (NYSEARCA:ONN) and Skyworks Solutions (NASDAQ:SWKS)] AMD's stats do not warrant overvaluation fears:

P/Sales 0.9 1.4 1.9 3.5
P/FCF 10 13.4 11.9 27.8
ROE % 46.5 3 21.3 10.4
Gross Margin % 48.5 51.6 46.4 47

Source: S&P Company Compustat Report

The bad news is, technical indicators look very ugly and AMD trades more like a penny stock than a multi-billion semiconductor company with a beta of 2.2. Current price around $6.9 is below 200 and 50-day SMAs:

(Click to enlarge)

MACD has flashed sell since mid-May and currently sits below EMA, at -0.39, with a negative divergence of -0.04. RSI & %R Williams both confirm the stock to be oversold.

Analyst sentiment is mixed, with a 12-month mean price target of $9.54. Independent research firms Market Edge and Ned Davis Research have both downgraded the equity recently, but S&P, Thomson Reuters and Channel Trend have upgraded it.

Technicals look scary enough, but short term, the biggest drag on AMD is the lack of a CEO. The company has been looking for half a year now, and investors are palpably skitterish. Shares jumped more than 4% on June 21st, when Bright Side of News reported that AMD has chosen a new CEO from IBM (NYSE:IBM). AMD remained predictably mum on the matter.

With broad indexes showing weakness, AMD's high beta and potential for a strong catalyst such as a CEO announcement make it a good candidate for a swing trade. A few option plays for your consideration:

Purchasing Jan 21st $7.50 calls for a premium of $.70 per contract implies a break-even price of $8.20 and significant upside potential given mean consensus price target of $9.50.

Selling Jan 21st $6 puts for a premium of $.50 per contract implies a break-even price of $5.50 and an assigned yearly return of 16.6% (for comparison purposes only.

Disclosure: I am long INTC.