If I had to describe my identity as an investor in one word, it'd be "contrarian." As such, I am always on the lookout for overly beaten-down stocks that could see turnarounds in the near to medium term. Advanced Micro Devices (AMD) is one such company that I believe could see a significant turnaround within the next six to 12 months.
AMD is a fabless semiconductor that designs x86 compatible CPUs, GPUs, and APUs (CPUs with GPUs built on die) for the consumer, professional, and server markets. In 2011, it was the 11th largest semiconductor company in terms of sales. The stock initially had a nice run in the first half of the year, especially as the company's APU strategy coupled with being first to market with 28nm GPUs seemed to indicate operating strength under new CEO Rory Read. Unfortunately, in the most recent quarter the company dealt investors a one-two punch of a revenue warning coupled with tepid guidance, rewarding shareholders with new 52-week lows in the high $3 area before bouncing back to the low $4s.
Despite the short-term headwinds the company is clearly experiencing, there's still a lot to like about AMD.
Profitability
Despite coming in short on revenues, AMD still managed to turn a $37 million operating profit when all was said and done. Furthermore, during the earnings call Read emphasized that the company's focus going forward will be on "profitability" and "profitable growth." Given the short-term uncertainties in the PC space, both from the perceived assault from tablets and macroeconomic problems, it is prudent to focus on paying off debt and building a cash war chest.
Product Pipeline Looks Compelling
Despite AMD's failure to capture the performance crown from Intel (INTC) at the high end of the CPU market, AMD's products offer compelling performance in both graphics and CPU performance for mainstream notebooks and desktops. The further tightening of the integration of the CPU and GPU in upcoming APU products should lead performance and power efficiency increases. AMD's next generation CPU core called "Piledriver" has already seemed to remedy most of the performance shortcomings of its "Bulldozer" microarchitecture. As Piledriver is deployed to server and desktops, the company should start to take back market share in these weak spots for the company. In discrete graphics, AMD has been competitive and I expect it to continue to be going forward.
Duopoly Squared
Even though AMD is a distant second-place player in the x86 space against Intel, it is fairly competitive in the graphics space. According to the Steam Hardware Survey (the vast majority of PC gamers use Steam, a digital distribution service for PC games), 35.53% of gamers use AMD graphics cards and 46.52% use chips from rival Nvidia (NVDA). AMD's integrated graphics solutions significantly outperform Intel's solutions, making AMD's solutions attractive in both the U.S. markets and emerging markets to gamers on a budget.
Valuation Is Attractive
Despite its unique position in the aforementioned duopolies and its large portfolio of patents and innovations in high-performance CPUs and GPUs, the company's market capitalization sits at a paltry $2.90 billion. This values the company at 0.46 times sales and 9.53 times forward earnings, both significantly lower than the semiconductor industry medians of 1.01 and 16.2, respectively. Furthermore, while AMD holds a net debt position of $440 million, it's important to realize that the majority of this is due to previous management's ill-fated ATI acquisition for $5.4 billion. The company has been diligent in reducing its debt over the years, and I do not expect it is at any significant risk of insolvency.
Looks Like A Bottom
After the disappointing earnings report, the stock found its way into the low $4s and seems to want to stay there in the near term. The stock dipped briefly below $4 when the company announced the issuance of $500 million worth of senior notes, but it quickly rebounded. At this point, all the bad news is baked in and the short sellers have piled in, with roughly 13% of the outstanding shares shorted. Any good news at this point (partnership, merger/acquisition, better-than-expected-earnings, etc.) would serve as a catalyst to induce a fairly significant short-squeeze.
AMD is a high beta stock, so if you do decide to get in, I recommend scaling into the position in small lots to ensure a more optimal cost basis.
