Shares of Advanced Micro Devices, Inc. (AMD) have dropped sharply in the past 5 weeks, from about $8, to below $6 per share. With investors giving up on stocks over fears about the European debt crisis, it has unfairly pushed down valuations of solid companies like AMD. It's unlikely that anything at the company has happened in the past 5 weeks to merit a 25% drop in the stock, it appears to be a case of indiscriminate selling that shrewd investors might want to take advantage of now. Here are 4 reasons to consider buying AMD shares on this dip for a potential double:
1. The fundamentals are good: Advanced Micro Devices has a strong balance sheet with about $1.54 billion in cash and around $2 billion in debt. The company recently reported solid financial results that beat expectations. For the first quarter of 2012, it saw revenues of $1.59 billion, and earnings per share of 12 cents. Consensus estimates were for revenues of $1.56 billion and 9 cents per share in earnings. The market seems to have completely forgotten that AMD posted solid results and guidance for 2012, but it might get a reminder when the company reports results next quarter, and that could push the shares higher.
2. The company is launching the "Trinity" processor which offers increased speed, improved graphics and battery life. The company also plans to introduce a specialized processor for tablets, called "Tamesh" sometime next year. These new product launches are likely to increase revenue growth and expand profit margins.
3. AMD could benefit from what is likely to be an industry-wide upgrade cycle thanks to the introduction of Microsoft's Windows 8. The latest offering by Microsoft is expected to launch in the next few weeks, and it offers more features and improved compatibility with tablets and smart phones. A new Windows operating system is likely to generate a wave of new laptop and desktop sales, especially in the Fall, as back-to-school season spurs additional demand.
4. AMD shares appear to be undervalued, especially when compared to Intel (INTC) and other tech stocks. Intel shares trade for about 10 times earnings, while AMD trades for around 7 times earnings. Intel offers a dividend, while AMD shares do not, however, AMD is a smaller company with possibly higher growth prospects with its new product launches. To be sure, the risks appear higher with AMD, however, so do the potential rewards. AMD shares also look undervalued when compared to Micron Technology Inc. (MU) which trades for almost the same share price. Some analysts expect Micron to lose money in 2012, and earn just 59 cents for 2013, while AMD is expected to be solidly profitable in 2012 and earn far more, about 89 cents in 2013. In late April, an analyst at Citigroup (C) set a $12 price target for AMD shares. The analyst cited "consistent execution", potential improvements in gross margins, and other positives. From current levels, investors could be looking at doubling their money, based on the price target from Citigroup.
Key Data Points For Advanced Micro Devices From Yahoo Finance:
Current Share Price: $5.73
52-Week Range: $4.31 to $8.35
2012 Earnings Estimate: 75 cents per share
2013 Earnings Estimate: 89 cents per share
P/E Ratio: about 7 times earnings
Key Data Points For Intel From Yahoo Finance:
Current Share Price: $25.14
52-Week Range: $19.16 to $29.27
Dividend: 84 cents which yields 3.3%
2012 Earnings Estimate: $2.50 per share
2013 Earnings Estimate: $2.69 per share
P/E Ratio: about 10 times earnings
Key Data Points For Micron Technology From Yahoo Finance:
Current Share Price: $5.45
52-Week Range: $19.16 to $29.27
2012 Earnings Estimate: a loss of 63 cents per share
2013 Earnings Estimate: 59 cents per share
P/E Ratio: n/a due to losses
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.