Will AMD Be the Turnaround Story of 2013?

amdWith shares of Advanced Micro Devices (NYSE:AMD) trading at around $2.49, is AMD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

As always, this is an intriguing story. The details might change from year to year, but there is always a lot of drama with Advanced Micro Devices. This has a lot to do with its fierce rivalry with Intel Corporation (NASDAQ:INTC) — and hope. In regards to the latter, the questions is whether or not that hope will ever turn into reality. While the market has been soaring over the past few years, Advanced Micro Devices has been getting crushed. Therefore, unless there is a substantial change in operations, it’s hard to imagine the stock doing well if the broader market trend reverses itself.

Interestingly, Advanced Micro Devices just released earnings that left a lot to be desired, yet the stock is still climbing due to optimism for the future. Q4 EPS came in at – $0.14.

There are two ways to look at this number. If you’re an optimist, then you can say that it beat estimates by $0.06. If you’re a pessimist, then you can say that it was a wider loss year-over-year.

Q4 revenue came in at $1.16 billion, which is a 32 percent decrease year-over-year. FY2012 Non-GAAP EPS came in at – $0.16, and FY2012 revenue came in at $5.42 billion. The latter was a 17 percent decrease year-over-year. However, positives included a Non-GAAP gross margin increase of 8 percent, a decrease in operating costs, and the fact that approximately 1/3 of laptops sold over the holidays use AMD APUs.

That said, the biggest positive was CEO Rory Read offering a JFK-like speech. To summarize, the company plans to evolve its operating model by diversifying its product portfolio to match the current PC environment. There is a big focus on innovation, and today’s investments are also aimed at leveraging distinctive IP to drive growth in ultra-low power client devices, semi-custom SoCs, and dense servers.

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Two comments stood out above all others. One was that the company expects to “transform operations models to business models of today.” The other was more powerful, which was that the company expects to “deliver differentiated and groundbreaking APUs to customers in 2013.” The word “groundbreaking” is the key. A CEO using that word is putting a lot on the line.

Let’s take a look at some important numbers for Advanced Micro Devices before forming an opinion…

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Advanced Micro Devices is weak. Debt management has been poor for a long time. However, the balance sheet isn’t in terrible condition, and cash flow is slowly improving.   

Debt-To-Equity

Cash

Long-Term Debt

AMD

2.06

$1.30 Billion

$2.04 Billion

INTC

0.15

$10.46 Billion

$7.16 Billion

NVDA

0.00

$3.44 Billion

$19.63 Million

 

T = Technicals on the Stock Chart Are Weak

Advanced Micro Devices has underperformed Intel and NVIDIDA Corporation (NASDAQ:NVDA) over a three-year time frame. It has also underperformed the market by a wide margin. Furthermore, Advanced Micro Devices doesn’t offer a dividend whereas Intel currently yields 4.20 percent and NVIDIA currently yields 2.50 percent.

1 Month

Year-To-Date

1 Year

3 Year

AMD

-3.86%

3.75%

-61.21%

-68.40%

INTC

2.00%

2.72%

-16.92%

17.48%

NVDA

-1.94%

-1.22%

-16.58%

-25.95%

 

At $2.49, Advanced Micro Devices is trading above its 50-day SMA, and below its 100-day and 200-day SMA.     

50-Day SMA

2.31

100-Day SMA

2.72

200-Day SMA

4.28

 

E = Earnings Have Been Inconsistent

Earnings had been improving since 2007, and revenue had been improving since 2009. The year 2012 looked like a step in the wrong direction, but numbers are sometimes deceiving. 2012 was a year of restructuring for the company, which will hopefully pave the way for better results in the future.

2007

2008

2009

2010

2011

Revenue ($)in billions

5.86

5.81

5.40

6.49

6.57

Diluted EPS ($)

-6.08

-5.15

0.45

0.64

0.66

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.69

1.69

1.59

1.41

1.27

Diluted EPS ($)

0.13

-0.23

-0.80

0.05

-0.21

 

T = Trends Do Not Support the Industry

The PC industry is weak, which is important since at least 80 percent of revenue for Advanced Micro Devices stems for PCs. The company is attempting to be more innovative in other areas, such as cloud servers and tablets. There is also a goal for PC revenue to drop to below 50 percent. It’s obvious that management is aware that it can’t survive with the current game-plan. This is a good sign. Some management teams never make this realization, which leads to failure.

Conclusion

Advanced Micro Devices is the ultimate coin flip. There are so many positives and negatives pulling at each other that it’s difficult to form a concrete opinion. On the negative side, this is a company with awful stock performance in a strong market, poor margins, weak cash flow, intense competition from Intel and NVIDIA, and decreasing sales. On the positive side, management has been making wise decisions/sacrifices that are setting the company up for future market share gains.

Based on all factors, Advanced Micro Devices is a WAIT AND SEE.

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