Optimism in AMD? It's Overdone

Editor's note: This article has been updated to reflect AMD's stated first-quarter guidance. The previous version cited management's projected 9% first-quarter revenue decline as year-over-year, but the projected decline was actually quarter to quarter.

NEW YORK ( TheStreet) -- Since reporting fiscal first-quarter results April 18, shares of beleaguered chip company Advanced Micro Devices ( AMD) traded as high as $3.99 (on May 9), a gain of 66%. Is it deserved?

AMD's results were better than expected, but this company still has far to go to catch rivals Qualcomm ( QCOM) and Broadcom ( BRCM) in mobile device dominance. Granted, management's new emphasis on the videogame industry should serve some near-term upside for the stock. This means that AMD's no longer on deathwatch.

However, with gains of 66% in a manner of weeks, investors still holding at this level are playing a game of chicken with their portfolios.

I like a good turnaround story as much as the next person. But jumping on AMD's bandwagon here after the company posted results that were (at best) "less bad" than expected seems overdone. It's hard to be impressed with a 6% decline in quarter-over-quarter revenue and a 32% decline year over year. Nevertheless, bulls jumped for joy that AMD beat estimates, while also forgetting that this was the second consecutive quarter of 30%+ sales erosion.

The company posted a non-GAAP net loss of 13 cents per share, or $94 million, which, after one-time charges, beat estimates of a net loss of 17 cents.

This is clearly a company with underlying fundamental issues. Meanwhile, rivals including ARM Holdings ( ARMH) are posting record revenue in chip license and royalties that increased 24% and 33% respectively. The beneficiaries of this growth have been Qualcomm, which posted a 24% surge in revenue. Along with Broadcom, Qualcomm continues to dominate smartphones and tablets. What's left for AMD? Games aren't going to cut it. Management believes it will.

Regardless, AMD investors are filled with optimism. I appreciate that. However, given the company's lack of competitive leverage, I do wonder if management's aggressive growth strategy, which will likely arrive at the expense of better margins, can work in the long term. It's not as if AMD has been raking in the cash -- it's now posted four consecutive quarters of negative cash flow. It's a "lose if you do and lose if you don't" situation.

It's worth noting here that management has now outlined steps to turn cash-flow positive by the second half of the year. But given AMD's persistent declining revenue and margins, it may require more cost-cutting measures on top of the recent workforce reduction, to increase profitability.

I just don't believe much of this will matter. That sounds overly pessimistic, but AMD doesn't exactly have a strong history of execution. What's more, the fact that management still plans to focus on portions of the business that still have a dependency on PCs is a mistake.

How can investors trust management will in the future? Essentially, the odds are still stacked against AMD. Not only is the company battling a dying PC-business, but AMD is also fighting against itself by wanting to be right. PCs are not coming back. Why invest in it?

I don't see a compelling reason to buy the stock at these levels. What's more, since Nov. 16, when AMD reached a low of $1.81 a share, the stock is now up more than 120%. Again, while there are signs of improvement, these shares might have already reached their expected highs for the year.

If management can execute and return the company to profitability, then the stock may have legs. But at this point I think the safer play here is to take your profits and wait and see what the next quarter brings.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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