Is AMD Going Out Of Business?

| About: Advanced Micro (AMD)
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For the last 4 months or so, AMD (NASDAQ:AMD) has been the worst performing stock in my portfolio. The stock has been performing even worse than Nokia (NYSE:NOK), which fights for its very survival. The market goes down, AMD goes down. The market goes up, AMD still goes down.

The company has lost more than 50% of its market value in the last half year and it still continues to bleed. It looks like AMD is not able to find its bottom no matter how many disasters get baked in the company's share price.

At this point, AMD's pricing looks a lot like a company that's on the highway to bankruptcy. I mean, if I was on vacation for the last 6 months and came back today to check how my portfolio is doing, the first thing I'd be thinking would be: "is AMD going out of business?"

AMD's market cap is down from $5.84 billion to $2.48 billion and analysts still continue to downgrade the company like there is no tomorrow. I understand how the demand is weak in the computer industry and there are many challenges facing it, but aren't those troubles already baked in the share price of the company, now that it's down more than 50%?

In the recent months, most analysts covering the stock have lowered their earnings estimates by half or more. For this fiscal year, the analysts expect the company to earn between 24 cents and 40 cents a share with the average expectation being 28 cents per share. For 2013, the company is expected to earn between 14 cents and 56 cents per share with the average expectation being 41 cents per share. For 2014, the company is expected to earn between 42 cents and 73 cents per share with the average expectation being 61 cents per share.

These numbers are much smaller than they were a few months ago as the analysts expected the company to earn nearly $1 per share in this fiscal year. Still, the analysts expect the company to remain profitable and have a positive cash flow. No analyst sees the company losing money anytime soon let alone going bankrupt. Most analysts covering the stock rate it as either "Buy" or "Hold" with the price targets ranging from $4 to $8 per share. The average price target on the company is $5 per share.

I understand that the PC market is slowing and Intel (NASDAQ:INTC) is gaining market share over AMD; however, I don't think AMD is going out of business or anything and it shouldn't be priced as if it is going out of business. As of last quarter, AMD had $1.58 billion in cash and $2 billion in debt. Considering the company's market share of $2.48 billion, the company has plenty of cash, in addition to a lot of debt. As long as the company continues to generate positive cash flow, it shouldn't have trouble paying its debt as 75% of its debt is long term. The company's high inventories and declining pricing power will continue to be points of concern for the investors.

The company's margins are getting hurt by the pricing pressures caused by the high inventory and the fierce competition. As the company continues to cut the costs and reduce its inventory in the next year or two, the margins should find their bottom. In the last quarter, the company's gross margin was 45% and the company is looking at an operating margin of 44% for the rest of the year. As AMD is usually good at proactively cutting costs, I don't expect the management to let the margins to fall below 40%.

Any upside in the economy will be very bullish for this company, particularly in Asia and Europe. If the economy doesn't improve quickly, AMD will continue to suffer for a while. I believe that things will be tough for the company in the near and medium-term; however, this doesn't mean that the company will just go bankrupt. The way the investors are fleeing the company indicates that many of the company's investors actually see the company going bankrupt though.

Lately AMD has been on a shopping spree as the company has been hiring executives from a number of other companies. Recently Intel's John Gustafson became AMD's chief graphics product architect and Apple's Jim Keller became AMD's chief architect in its CPU division. I expect AMD to continue bringing in good talent in order to turn things around in the company.

I think AMD is a decent value play; however, the investors shouldn't expect to see results anytime soon. It will take a long time for the company's stock price to recover as it struggles to find its bottom. For the short term investors, buying AMD at the moment would be equivalent of catching a falling knife; however, the patient investors who are willing to hold onto their shares for at least a few years are likely to see handsome returns. AMD doesn't pay dividends, however one can earn income on their AMD shares by selling covered calls on them.

Disclosure: I am long AMD, NOK, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.