Advanced Micro Devices Providing a Great Buying Opportunity

NEW YORK (TheStreet) – Advanced Micro Devices (AMD) is roaring back and attacking the short-sellers right where it hurts the most -- in their pockets.

The stock, at around $4, is up 6% on the year to date, but trailing the tech sector's 11% gain. When you consider the 14% gain posted by chip sector, AMD seems like a laggard, right? But that's not why we're here.

On July 18, I stepped out on a limb and recommended AMD as a solid buy. This was after the company's lower-than-expected third-quarter guidance spooked investors into selling their shares. The stock opened the following trading day at $3.72, down 18.6%. It was a gross overreaction.

At the time, I said,

"That the stock is now declining opens the door for new investors to capitalize on possibly the quickest 18% bounce they'll ever see.

Wall Street saw disagreed. It seems, however, that's exactly what's happening.

Since that recommendation three weeks ago, shares of AMD are back over $4, gaining more than 10%. It's the easiest 10% investors have ever made. Wall Street focused too much on the guidance and ignored the 24% year-over-year jump in revenue. Not to mention, management reversed last year's 9-cent loss with a 2-cent profit.

Here's the other thing: "The cat is now out of the bag," as the saying goes.

Wall Street now expects a horrible third quarter. This means all AMD has to do is match expectations for the shares to continue their uptrend. If management surprises analysts with beat and raise, these shares are likely to reach $4.80 before the year is over. From Wednesday's close, we're looking at gains of possibly 20%.

It's no longer the 1990s and growth in personal computers are not coming back -- this is despite what indicators say. The recent gains in both Intel (INTC) and Microsoft (MSFT) have been due (in part) to Microsoft ending support for Windows XP. This spurred a faster-than-expected refresh in PCs. But this will be short-lived. Rory Read, AMD's CEO understands this.

To that end, he's taking the company on a new direction, moving the chip giant away from a pure-play PC shop to a strong player in video game chip technology, among other areas such as the solid-state drives business (SSD). This is an area currently dominated by Micron (MU) and SanDisk (SNDK).

What's more, last week the company released its FirePro S9150 server card. This is described (according to AMD) as the most powerful server Graphics Processing Unit ever built for High Performance Computing. No one has yet to dispute this claim -- not Intel or Nvidia (NVDA).

In a nutshell, imagine the most complex computer task you've ever wanted to complete. Then increase the difficulty level by 100% -- the FirePro S9150 can accomplish that task with room to spare. Questions remain regarding the market for this chip. Management has yet to issue guidance and revenue projections so it's premature to speculate.

Suffice it to say, there are still growth opportunities at AMD. Management's job is to get the company back to cash flow positive. They can do this by executing on the gaming strategy and maintain the growth performance of its high-margin graphics and visualization business. Investors only need to be patient and not overreact.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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 robust revenue growth, notable return on equity and impressive record of earnings per share growth. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet."

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

  • The revenue growth came in higher than the industry average of 8.9%. Since the same quarter one year prior, revenues rose by 24.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving 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 ($0.12 versus -$0.11).
  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
  • 37.96% 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 -2.49% significantly underperformed when compared to the industry average.
  • The debt-to-equity ratio is very high at 4.41 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 1.21, demonstrating the ability to handle short-term liquidity needs.

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