Emotion Trumps Reason for AMD Investors

NEW YORK (TheStreet) -- In August 2013, as shares of Advanced Micro Devices (AMD) traded around $3.80, I told you that the stock was a good short to $3.00. AMD investors disagreed. And it didn't take long for them to take their shots at me when the stock broke above $4 per share last month. But they've conveniently forgotten that the stock did reach $3.04 on Oct. 23, just 1% from my short target. But why let facts get in the way?

Nevertheless, this new enthusiasm was short-lived following the stock's recent dip to $3.29 last week. And despite more talk about how AMD is going to "take the gaming world by storm," AMD's management has given me no reason to change my sentiment.

I will grant that the company has become more vocal about its direction. It's also encouraging that management has released a new graphics chip called Mantle to counter Microsoft's (MSFT) DirectX, which has become a respected standard in the gaming world. But it seems AMD has been in this "perpetual PC exit" for over a year. At this point, I remain unconvinced that management can execute any strategy aimed at transitioning the company into the gaming the world.

With revenue jumping 38% year-over-year and 9% sequentially (besting Street estimates), AMD posted impressive fourth-quarter results. There's no debating this. It's also important for investors to understand the depths from which this company has emerged. It's true that GAAP earnings almost doubled this quarter. But that's also because the company absorbed almost a half-billion loss in the year-ago quarter.

What's more, even when looking at things on a non-GAAP basis, which produced 6 cents in earnings-per-share, there are "shoulder-shrugging" reasons. It's true the company did beat Street estimates by 1 or 2 cents, depending on which estimates you follow, let's not forget that AMD benefited greatly from a $48 million legal settlement. On an organic basis, there was very little about which to get excited.

I believe management understands this, which is why the company offered downbeat guidance for the current quarter. The company expects revenues to decline anywhere between 13% and 19% from the recent 38% jump. Analysts were expecting first-quarter revenue of $1.36 billion. But guidance suggests a low-range of $1.33 billion.


Investors in the "glass-half-full camp" will cite that this still represents more than 20% year-over-year growth. Again, while this may be true, don't forget how brutal last year's first's quarter was. As I've said, this company has been in continuous recovery. It's time to ask: When will the ship finally dock?

In fairness to management, they continue to call it as they see it. The numbers are what they are. And it's not their fault that investors continue to mix and match results to suit their biases. But in the process, it's dangerous to assume that AMD doesn't face significant pressure from the likes of Intel (INTC) and NVIDIA (NVDA), even if those companies are shells of their former selves. They've done moderately better than AMD in navigating the declining PC market.

Unlike Intel, which recently formed a partnership with Apple (AAPL), there are no such lifelines for AMD. Not to the extent to justify optimism about the company's future.

As management continues its cost-cutting measures as a way to boost the bottom line, I can't understand how AMD expects to emerge more competitive by not spending more in areas like research and development. Companies don't "save" their way to more revenue and market share. It costs money. The restructuring continues.

The question here is how long are investors willing to wait for this company to finally arrive. Suffice it to say, there are many question marks with AMD's current market position. Unfortunately, with each passing quarter, more questions emerge than are answered. And absent better operating results and a clear recovery plan, I see no reason to change my price target from $3.

At the time of publication, the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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