Updated from 9:49 a.m. EDT

Underdog chipmaker Advanced Micro Devices ( AMD) blew past first-quarter estimates Wednesday, posting a 73% year-over-year increase in sales.

Still, shares of AMD sank Thursday, recently down $1.12, or 6.5%, to $16.00. Wall Street analysts responded to the first-quarter report by ratcheting up estimates but still expressed concerns about the company's balance sheet and the stock's valuations.

Deutsche Bank analyst Ben Lynch noted that AMD's 2005 price-to-sales multiple of 1.0 may appear attractive. But with net debt of $1 billion -- 17% of the company's market cap as of Wednesday's close -- the enterprise-value-to-sales ratio increases 44%. "In addition, despite a solid turnaround strategy, we struggle to see how AMD will generate through-cycle positive returns and free cash flow in the long term," Lynch wrote. (He has a hold rating on the stock and his firm has done banking with AMD.)

CIBC World Markets analyst Allan Mishan was even more negative, although he raised his estimates, too. "We do applaud AMD for gaining share in the flash memory business," he wrote in a note Thursday morning. But "we continue to believe AMD has little market power, faces a tough 2004 in the PC processor business, and may have run out of flash share gains for the time being."

Mishan, who has a sector underperformer rating on AMD, noted the stock's price-to-earnings multiples of 31 times 2004 earnings and 24 times 2005 earnings are "hardly bargain prices." They reflect the market's belief that AMD will either post faster revenue growth in 2006 and beyond or improve its operating margins; both could happen, Mishan said, but that doesn't justify the stock price. (CIBC hasn't done banking with AMD.)

After the bell Wednesday, AMD posted a first-quarter profit of $45.1 million, or 12 cents a share. That reversed a net loss of $146.4 million, or 42 cents a share, in the same period a year earlier and far surpassed the 4-cents-a-share consensus estimate gathered by Thomson First Call. AMD's first-quarter sales totaled $1.236 billion, up 73% from a year ago. That also beat the consensus estimate of $1.175 billion.

Year-ago figures do not include data for FASL, AMD's memory-making joint venture with Fujitsu. Last quarter, analysts said complex accounting for FASL results made AMD's finances harder to forecast. That could be one explanation for AMD's big beat Wednesday.

Susquehanna Financial Group analyst Tai Nguyen, however, didn't think that reason was at play this quarter. "I think the number is definitely higher just driven by the handset market," he said. "Overall, they seem to be executing well." Nguyen upgraded his rating on AMD Wednesday morning to net positive from neutral; his firm doesn't do investment banking.

The quarter was AMD's second profitable one since June 2001. Its report Wednesday comes a day after its much larger rival Intel ( INTC) reported a largely in-line quarter that offered little to impress investors.

"AMD continued to increase its market leadership position in the wireless handset and embedded markets," CFO Robert Rivet said in a press release. Unit volume shipments of the AMD64 platform of processors more than doubled from the previous quarter, he said.

Earlier this year AMD scored an incremental win when boxmaker Hewlett-Packard ( HPQ) shifted to AMD's chips at the expense of rival Intel. That came after AMD already saw its chips adopted by IBM ( IBM) and Sun Microsystems ( SUNW).

AMD's gross margin reached 37.8% in the first quarter, 2 percentage points higher than the previous quarter, largely driven by flash memory sales and higher average selling prices.

By business, AMD said its first-quarter processor sales were $571 million, a decrease of 2% from the fourth quarter and an increase of 22% from a year ago. Operating income totaled $67 million in the first quarter, compared to $63 million in the previous quarter.

The memory group achieved record sales of $628 million, an increase of 11% from the previous quarter and a 188% jump from a year ago. That was driven by the wireless and embedded markets, which includes consumer electronics and automotive, and strength in the Asia Pacific and Americas region, the company said. The flash memory business posted operating income of $14 million, reversing a loss of $3 million in the fourth quarter, driven by higher sales and average selling prices.

Looking forward, AMD said it expects aggregate sales to come in approximately flat in the second quarter, with a modest increase in its memory group offset by a modest decline in its computation products group. The company did not offer specific EPS guidance, but acknowledged on a postclose conference call that gross margins could decline in the second quarter.

Leading up to Wednesday's report, the Wall Street consensus predicted a June profit of 3 cents a share with sales slightly up to $1.179 billion.