Should You Buy Advanced Micro Devices, Inc. (AMD) Stock? 3 Pros, 3 Cons

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Advanced Micro Devices, Inc. (NASDAQ:AMD) has given investors quite the ride lately. After running up almost continuously from $2 to $10 in 2016, AMD stock appeared set to continue its winning ways this year. AMD moved up above $15 at one point in March.

AMD Stock: Should You Buy Advanced Micro Devices, Inc. (AMD) Stock? 3 Pros, 3 Cons

However, things have gotten messy since then. A lousy earnings report caused investors to dump AMD stock in droves. After sinking to $10, it recovered, seemingly, last week. The stock shot up almost 10% on reports of a crucial new partnership.

But that report appears to have been what you could call fake news. After Intel Corporation (NASDAQ:INTC) flatly denied the report, AMD shares crumbled, losing 10% of their value the next day. Given the recent gyrations, is Advanced Micro Devices worth buying here?

AMD Stock Cons

Lots of Rumors, Few Facts: AMD stock produces all sorts of rumors. It can be a difficult company to keep track of, since so much stuff is reported without confirmation. The latest, and one of the most damaging, of these unfounded reports came last week. Several prominent blogs and authors suggested that Intel and AMD had reached a licensing deal. This supposedly came on the heels of Intel’s deal with Nvidia Corporation (NASDAQ:NVDA) expiring.

However, it appears this simply wasn’t so. Intel unequivocally denied the reports, saying: “The recent rumors that Intel has licensed AMD’s graphics technology are untrue.” Hard to argue with a statement like that. This is just the latest in a series of reports suggesting AMD has achieved something great, such as Intel-beating specs on new products, that turns out to be something else later. AMD’s PR department doesn’t do much to squelch these errant reports, leaving investors to potentially get an overly rosy view of the company.

Analysts Are Skeptical: Analysts are one important group of people skeptical on AMD. And this group of skeptics grew last week, following AMD’s investor day. One would hope that AMD could win over some of its doubters.

Instead, Loop Capital cut the company to “hold” following investor day. That brings the total count of analyst shops with hold ratings up to almost a dozen now. Wall Street isn’t generally known for skepticism; they tend to mostly throw buy ratings around. AMD stock dropped 10% on investor’s day, though it was also the day the Intel partnership news was debunked. So it can be hard to sort out why exactly the stock dropped. Regardless, the lack of analyst enthusiasm didn’t help matters.

Still Deeply Unprofitable: AMD’s last quarter underwhelmed the market. And it’s not hard to see why. Despite the company’s rapid revenue growth, it still struggling to get anywhere close to profitability.

Its weak profit margins are to blame. The company earned only a 34% gross profit margin; quite low by tech standards. The company’s SG&A expenses of almost $400 million more than ate up the $331 million of gross margin for the quarter. And the company’s more than $250 million outlay for research and development spending also almost equals its gross profit. Simply put, incremental revenue growth won’t be enough to make this company profitable.

AMD Stock Pros

Rising Market Share: For the first time in a long time, AMD is looking more competitive in one major front against Intel. In the X86 computing market share battle, AMD is finally on the rebound.

The company has put in three consecutive quarters with rising shares against Intel. Interestingly, this is the first time AMD has managed that feat since 2010. On an overall share basis, this is the first meaningful uptick since 2012. AMD got as high as 45% of the market a decade ago but fell to as low as 18% recently. With the gains last quarter, they’re now back over 20%.

Product Launches: And market share gains should continue. As most people probably know, AMD has a robust new product launch cycle going for 2017. And since Intel has less in the works than AMD, momentum is on the underdog’s side.

Now, it needs to deliver. The stock hasn’t run from $2 to the double digits on results just yet. Advanced Micro Devices has halted its slide for the time being. But the back half of 2017 now gives the company the chance to show it can do more than just hold its ground. Spike that market share back over 25% by year-end, and AMD stock will look like a real competitor to Intel rather than just a survivor.

Big Short Interest: As I’ve warned before, short interest in and of itself isn’t always bullish. Short sellers are often right ultimately. However, a highly shorted stock often leads to spectacular rallies, at least in the short-term. While you might want to exercise more caution investing long-term in a short-seller-laden outfit, they make for exciting trading set-ups.

With that in mind, it’s worth noting that investors have sold 15% of AMD stock’s float short. This figure has been nearly unchanged since last September. No part of the AMD stock price roller coaster seems to have scared off the doubters. And as AMD’s float increases, the overall short position is continuing to rise. It’s up from 100 million shares in January to 121 million as of the latest available data. While earnings last quarter provoked a big drop, an earnings surprise in the other direction next quarter could set off a runaway short squeeze.

Verdict

AMD is a deeply risky stock. The company hasn’t earned a profit in years, and is nowhere close to doing so now. It needs huge growth, not just incremental improvement, to become a profitable franchise again.

The company’s balance sheet is fine, it has enough cash to carry on for quite awhile. But overall tangible book value here is negative. There is no dividend. Some of the hype around AMD’s product launches is likely to go flat, at least if the recent past is any guide.

With the stock up 500% in recent quarters, a potential investor here is paying a high price for a speculative story. You could hit it big with a well-timed short squeeze, but guard your downside closely. I wouldn’t be shocked, at all, to see AMD stock back in the single digits later this year.

At the time of this writing, Ian Bezek held INTC stock. He had no position in AMD stock. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/buy-advanced-micro-devices-inc-amd-stock-pros-cons/.

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