Why Advanced Micro Devices Selloff Is a Great Buying Opportunity

NEW YORK (TheStreet) – Shares of Advanced Micro Devices (AMD) have taken a sharp downward turn, falling more than 18% following the release of the company's second-quarter financial results.

Prior to the announcement, Advanced Micro stock, which has soared 24% in three months, had been a relative outperformed. This compares to 4% and 5% gains for chip stocks like Nvidia (NVDA) and Texas Instruments (TXN), respectively.

From Thursday's closing price of $4.57, Advanced Micro shares are up 18% on the year to date. Those gains, however, have evaporated quickly. The stock closed Friday at $3.83, down 16%. This is nothing more than a gross overreaction to numbers that were -- in my opinion -- actually better than expected.

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By ignoring the 24% year-over-year jump in revenue and that management reversed last year's nine-cent loss to a two-cent profit, investors demonstrated their lack of understanding of what the company is actually working to achieve. That the stock is now declining opens the door for new investors to capitalize on possibly the quickest 18% bounce they'll ever see.

Advanced Micro has a new direction. CEO Rory Read is working to transition the company away from being a pure-play PC shop to a strong player in video game chip technology, among other areas.

This move makes perfect sense given that processor revenue just fell 20%. But due to Advanced Micro's efficiency improvements, that segment still posted a profit. No one saw that coming, especially since the entire chip industry has struggled with low average selling price.

But with better-than-expected results just released from Intel (INTC) things are getting better. Not only does Intel project chip prices and volumes to rebound, but Intel has raised both its third-quarter and full-year margin outlook, suggesting there is still money to be made in this industry.

Although Advanced Micro's $1.47 billion third-quarter revenue outlook, which was 6% shy of estimates, didn't reflect the sort of confidence investors would like, management is not going to set the company up to fail. To that end, Advance Micro has become more vocal about what it can and can't do, unlike in prior years.

It's true that both Intel and Hewlett-Packard (HPQ) are enjoying a resurgence due to a rebound in PC shipments. Market research firm Gartner, calls for a modest 2.6% PC-shipment increase in 2014, going from 308 million units to 316 million while projecting "a significant rebound" in 2015.

Still, there are no indications that this bounce will last. After all, the rise in mobile devices has yet to peak. Investors didn't see it that way.

From my vantage point, it would be foolish for Advanced Micro (or any company) to speculate on any prolonged PC recovery given Apple's (AAPL) recent enterprise deal with IBM (IBM). This tells me that tablets, particularly iPads, are set to grow in the workplace. And this is after mobile devices have already dominated the consumer market.

This is not to rule out any potential revenue growth from which Advanced Micro might benefit due to a stabilized PC market. But there are external factors that supports why management has chosen the "conservative route" with guidance.

If management can execute on its gaming strategy while continuing to grow its graphics and visualization business (up 141% year over year this quarter), Advanced Micro will become cash-flow positive in a much quicker time than expected. At that point, any growth in its PC segment will only be icing on the cake. And new investors would have gotten a sweet deal.

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.

TheStreet Ratings team rates ADVANCED MICRO DEVICES as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ADVANCED MICRO DEVICES (AMD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and generally higher debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.9%. Since the same quarter one year prior, revenues rose by 28.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • ADVANCED MICRO DEVICES reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, ADVANCED MICRO DEVICES continued to lose money by earning -$0.11 versus -$1.59 in the prior year. This year, the market expects an improvement in earnings ($0.17 versus -$0.11).
  • 38.44% is the gross profit margin for ADVANCED MICRO DEVICES which we consider to be strong. Regardless of AMD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, AMD's net profit margin of -1.43% significantly underperformed when compared to the industry average.
  • The debt-to-equity ratio is very high at 4.18 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Even though the debt-to-equity ratio is weak, AMD's quick ratio is somewhat strong at 1.26, demonstrating the ability to handle short-term liquidity needs.
  • Net operating cash flow has decreased to -$204.00 million or 31.61% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

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