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Advanced Micro Devices, Inc. (AMD) Stock: 2 Reasons to Steer Clear

AMD stock is absolutely red-hot, but its comparisons to competitors to INTC and NVDA are getting out of hand

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Advanced Micro Devices (NASDAQ:AMD) is coming off a fourth-quarter earnings beat in which the company reported $1.1 billion in revenue. AMD stock bounced 16% to above the $12 level as a result, continuing a red-hot streak of nearly 500% returns in just 52 weeks.

This was a sub-$2 stock just a year ago amid fears about competition and potential bankruptcy.

AMD is a leading maker of graphics cards, including Radeon for consumers and FirePro for workstations. The company operates in two segments: Computing and Graphics, which makes desktop and notebook processors and professional graphics; and Enterprise, Embedded and Semi-Custom, producing server chips, embedded processors for the Internet of Things and chips for gaming consoles.

Since taking the helm two years ago, Advanced Micro Devices CEO Lisa Su — an MIT-educated electrical engineer who has authored over 40 technical papers — has presided over a remarkable recovery. Now, AMD, having played second fiddle to Intel Corporation (NASDAQ:INTC) for decades, is making a play for the PC and server markets, Intel’s bread and butter. AMD’s Ryzen CPU will challenge Intel’s Core i5 and i7 chips.

AMD is moving up the value chain amid a falling PC market, going from low-end to high-end PC processors.

Even if prospects for Advanced Micro Devices’ business are good, though, investors have to deal with a few issues. AMD hasn’t posted an operating profit since the third quarter of 2014, holds a great deal of debt and yet trades at a stratospheric valuation.

Amid these high expectations and gains worthy of bubble talk, is AMD stock still a buy? Here are two problems that should have the bulls taking a second look.

AMD Has a Not-Great Balance Sheet

Despite many chipmakers such as AMD going “fabless” and outsourcing the fabrication of their chips to contract manufacturers such as Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), the industry remains capital-intensive.

Advanced Micro Devices escaped bankruptcy last year. It took advantage of low interest rates and improved investor confidence to restructure its debt in September 2016. AMD issued $600 million in shares and $450 million in convertible senior notes. This enabled AMD to pay off $676 million in debt due in 2020. So instead of $600 million in AMD debt maturing in 2019, only $196 million will mature that year.

Still, AMD is highly leveraged by several measures. With $1.435 billion in long-term debt and $416 million in shareholder equity as of Dec. 31, 2016, AMD’s long-term debt-to-equity ratio stands at 3.44. That figure is much lower for Intel, at 0.38, and Nvidia Corporation (NASDAQ:NVDA), at 0.37, indicating less leverage. Likewise, AMD’s debt-to-capital ratio of 0.775 stands above 0.27 for both INTC and NVDA.

Intel and Nvidia also are better able to service debt. For the year ended December 31, 2016, AMD generated only $90 million in operating cash flow, with $2.9 billion in total liabilities, a ratio of 0.031.

NVDA earned $1.462 billion in operating cash flow for the four quarters ended October 30, 2016, with $4.24 billion in total liabilities, a ratio of 0.34.

Intel showed an even healthier balance sheet, with $19.09 billion in operating cash flow for $48 billion in total liabilities, a ratio of 0.396.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/02/advanced-micro-devices-inc-amd-stock-2-reasons-to-steer-clear/.

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