SAN FRANCISCO -- It's hard to talk comeback when a company has just lost $1.8 billion in a three-month period and acknowledged paying 30% too much for the biggest acquisition in its history.

But Advanced Micro Devices ( AMD) proved something important to the Street with its fourth-quarter earnings report Thursday: the chipmaker may be hurting, but it's got plenty of fight left in it.

AMD's improving gross margin and rising chip prices, at a time when many investors had left the company for dead, seemed to hint at better things to come and energized its stock.

Shares of AMD popped as much as 12% at one point in early trading Friday, and was trading up 9.6%, or 61 cents, to $6.95 later at midday.

True, the stock has been crushed in recent months, falling 55% in the last three months. With so much pessimism priced in, the bar was set pretty low for AMD.

The Street's key misconception about AMD appears to be the company's new quad-core chips .

With all the publicity surrounding problems and delays, Wall Street seemed to have discounted any potential boost whatsoever from the new chips -- as if they didn't even exist.

Indeed, AMD shipped only 400,000 of the quad-core chips in the fourth-quarter because of the bug. But even those shipments were enough to have an impact on its business.

Server unit shipments increased 22% sequentially. Average selling prices were up 4%.

"I think people underestimated how much in demand these quad-core chips are," says FTN Midwest Securities analyst Joanne Feeney. "Even the ones with bugs are selling well."

"Our research indicates that the OEMs are just waiting. They have the motherboards ready, they have the customers ready. They're just waiting for the better chips to come," says Feeney, who has a buy rating on AMD.

Whether the Barcelona processor can ultimately stack up against Intel's ( INTC) competing Xeon chips in terms of performance and energy efficiency remains a hotly debated issue among the technical set. The truth is, however, it may not matter -- at least for now.

For more than a year, Intel has been the only game in town when it comes to quad-core processors for servers. Any alternative, as long as the product is not a total stinker, will find a receptive audience among vendors seeking to keep a measure of diversity in their suppliers and their products.

Indeed, the strength AMD said it experienced in its notebook chip business during the quarter, where its product lags Intel's, is another example of the importance of choice in the microprocessor market.

Of course, that's the traditional second-string role AMD has played, and not exactly as grandiose as AMD's aspirations of offering a product that's superior to Intel's. Given how dire AMD's situation has looked in recent months, though, even a second-tier role might provide some upside potential.

"We believe the risk-reward at current levels, with a full year's worth of bad news digested and discounted, presents a compelling entry point," wrote American Technology Research analyst Doug Freedman in a note to investors Friday upgrading AMD to a buy rating.

Freedman points to the $1.8 billion in cash on the balance sheet, as well as other potential cash sources such as the sale of fabrication facilities or of non-core businesses, as offering AMD some degree of insulation in the event of a liquidity crunch.

"While the quarter was not perfect by any means, the company is finally showing some expense discipline and appears focused on extracting value for shareholders," Freedman wrote.

AMD still has a lot of work to do to get itself out of the red -- a goal the company hopes to achieve, at least on an operating basis, by the third quarter.

Oppenheimer analyst Rick Schafer believes that AMD's management is making progress, but was turned off by the company's forecast of a 6% sequential increase in operating expenses in the current quarter.

"Were it not for guidance, we would be a believer in the company's goal of reaching operating profitability 3Q," Schafer wrote in a note to investors Friday. "In order to achieve that goal, either revenue growth must greatly outpace the market or further cost-cutting is necessary."

And with the specter of an economic downturn on the horizon, Schafer sees no reason to go with a struggling No.2 player.

"While some might be tempted to try and time a bottom, we would prefer to stick with higher quality names such as INTC, especially given macro uncertainties," Schafer wrote.