Advanced Micro Devices: Momentum Near For A Long Position

Sep. 7.11 | About: Advanced Micro (AMD)

Incorporated in 1969, Advanced Micro Devices (NYSE:AMD) spent about $1 million on lobbying in the second quarter to secure business deals. AMD is the world’s second-largest computer chips producer after Intel Corp. (NASDAQ:INTC). After eight months of vacancy, AMD named Rory Read as president and CEO to replace Dirk Meyer in August to speed up AMD’s recovery. Read is a former president and COO of Lenovo and known to drive double-digit revenue growth. Read also spent 23 years at IBM.

Read indicated that AMD's new Fusion chips -- a combo of graphics and computer processors -- will be the drivers for future growth. Timing is extremely important in this industry, where every company wants to be ahead in term of innovation and technology. AMD delayed the launch Bulldozer chips until October.

In its recent 10-K filing, AMD said that it might not have enough cash to meet debt obligations due to economic and financial unpredictability. AMD had $1.8 billion in liquid assets at the end of 2010, significantly less compared to $2.7 billion in 2009, to cover $2.4 billion debt and capital lease obligations. In the last two years, AMD lauched a number of new products despite tough economic times. This told investors that AMD reinvested its money into real projects and did not park a lot of cash.

Base

Period

12/23/05

Years Ending
Company / Index 12/31/06 12/29/07 12/27/08 12/26/09 12/25/10

Advanced Micro Devices, Inc.

100 66.72 24.00 7.15 32.49 26.36

S&P 500 Index

100 113.94 121.02 73.17 96.74 110.11

S&P 500 Semiconductors Index

100 88.06 98.98 51.20 85.92 95.27
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Based on the table, AMD failed to outperform the S&P 500 Semiconductors and Market Index during 2005-10. The momentum for AMD is built on the hope that AMD's fourth CEO can bring AMD to lead. Compared to AMD's previous CEOs -- Jerry Sanders (until 2002), Hector Ruiz (until 2008), and Dirk Meyer (until 2010) -- Read can bring customers' perspectives into the products after his working experience in the PC companies and end-users. This is in line with Steve Job's philosophy of combining art and science. With his background, Read is expected to close the gap between producers and customers and bring in more revenue. Therefore, AMD can create products that can add more enthusiasm and demand from a market. This also means that AMD will need to retain the best engineers to continue innovating and create better products.

In 2010, AMD generated $4,817 milions in net revenue from computing solutions and $1,663 millions from graphics. Although the gross profit margin increased by 4% to 46% in 2010, AMD spent 18% less in R&D expense to $1.4 billion due to dereased sales and cost reduction purpose. AMD also received $1.25 billion in legal settlements from Intel in 2009 and $283 million from Samsung (OTC:SSNLF).

I priced AMD at $8.5 based on my valuation model. I recommended a buy in the $5-6 range with a target price of $10-20. Analysts estimated 18.40% and 36.20% growth for AMD in 2011 and 2012. AMD is expected to double its growth in the next year compared to the industry.

Growth Est AMD Industry Sector S&P 500
Current Qtr. 20.00% -9.80% N/A 24.70%
Next Qtr. 71.40% -7.10% 494.20% 30.60%
This Year 18.40% 8.90% 18.50% 15.50%
Next Year 36.20% 15.90% 21.60% 15.00%
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Disclosure: I am long AMD.