SAN FRANCISCO -- Advanced Micro Devices ( AMD) did something it hasn't done in a long time: It proved Wall Street wrong.

While many analysts and investors had left AMD for dead, the chipmaker demonstrated that it was still alive and relevant -- customers are still buying its chips.

AMD delivered solid sales growth across all its product lines in the third quarter, increasing its revenue 15% sequentially, nearly twice the clip that Intel's ( INTC) sales increased (although AMD had the benefit of an easier comparison).

AMD also significantly boosted its gross profit margin and trimmed its operating expenses.

All told, AMD's third-quarter performance was an impressive showing for a company that has spent the past year defining dysfunctional, and a nice start for Dirk Meyer in his official role as CEO.

Shares of AMD, which are down almost 70% from their 52-week high, were up more than 9% to $4.50 in midday trading Friday.

Don't mistake AMD's third quarter for a comeback, though. It's more akin to a team scoring a few points in the closing minutes of a game it had already lost.

The new game kicks off in the current quarter, as Intel and AMD each release new server microprocessors. AMD will also compete in the latest contest as a radically different entity, once it sheds its manufacturing factories early next year in its so-called "asset smart" makeover.

And then, of course, there's the potential of a global economic recession, which could hurt everyone. Like just about every chipmaker in recent weeks including Intel, Fairchild Semiconductor ( FCS) and Altera ( ALTR), AMD offered a downbeat forecast for the fourth quarter, projecting that sales will remain flat sequentially.

"The market is weak, the asset-smart deal hasn't closed yet. They're still losing money," says Fred Weiss, of Atlantic Trust SteinRoe.

While Atlantic Trust currently owns Intel shares, Weiss says AMD has become a far more interesting investment prospect now that the company has made progress on spinning off its manufacturing assets, which will significantly reduce the company's capital expenditures.

"It's tantalizing because they now should be reasonably cash-flow stable, if not positive. If they get through the break-even line they should be doing nicely," he says.

Of course, everything depends on whether the soon-to-be separate manufacturing company can prove itself to be a viable, independent business. For that to happen, Weiss points out, the foundry company will need to attract more customers than just AMD -- something he says won't be easy.

In other words, it's still too early to gauge whether AMD is out of the woods.

Avi Cohen, director of research at Avian Securities and an outspoken AMD bear in the past, acknowledged that the company was in much better shape than it was a couple of months ago.

He credited the graphics business for most of AMD's upside surprise in the third quarter, as AMD's ATI division continues to take market share from rival Nvidia ( NVDA).

"Every two years these graphic guys leapfrog each other and it looks like it's ATI's turn," says Cohen.

But he says that even the ATI strength could be sapped in the event that PC sales suffer a significant slump in demand. The state of the economy will be one of the key factors affecting AMD in the near term, says Cohen.

"Q3 doesn't really matter a whole lot in the grand scheme of things," he says.

In the third quarter, AMD finally posted an operating profit. But the milestone was dismissed by analysts since it was achieved only thanks to the benefit of a $191 million, one-time technology licensing deal.

Still, AMD appears to be making progress towards stemming its losses.

American Technology Research analyst Doug Freedman, who rates AMD a buy, lauded the company's guidance to break even on an operating basis in the first quarter of 2009, thanks to higher gross margins and lower operating expenses.

"We believe the company continues to execute well on new products, asset-smart, and restructuring to achieve its target break-even point and consistent profitability," Freedman wrote in a note to investors Monday.

Freedman even reverted to valuing AMD on a price-earnings basis, instead of the price-sales basis used when the company had no earnings in sight. He predicted adjusted forward EPS of 60 cents for AMD.

At the same time though, Freedman chopped his price target to $8.50 from $10 due to the tough economic conditions.

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