Why Advanced Micro Devices, Inc. (AMD) Stock Has 85% Upside

The longstanding rumor that Intel Corporation (NASDAQ:INTC) would license Advanced Micro Devices, Inc.’s (NASDAQ:AMD) GPU intellectual property once Intel’s deal with Nvidia Corporation (NASDAQ:NVDA) ended in March appears to have hit a roadblock.

Why Advanced Micro Devices, Inc. (AMD) Stock Has 85% Upside

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A little more than a year ago, this rumor began circulating throughout the tech world and even though Intel made no attempt to quell the speculation, investors bought into it hook, line and sinker.

Up went AMD stock.

“Intel held its Investor Meeting on February 9, and I observed that there was no announcement. The month of March has come and gone, still without an announcement,” wrote Seeking Alpha tech contributor Mark Hibben on April 5. “At this point, one has to seriously question what has been going on ever since the Bloomberg non-report that attracted so much attention without a whit of journalistic traceability. I can’t prove the negative that there is no agreement, but I should think that any agreement would have been made public by now.”

It’s these kinds of rumors that keep me from investing more heavily in tech stocks. You really can’t trust a lot of the reporting going on, and while I doubt much of it is intentionally harmful, that’s precisely the result when a rumor like this is allowed to live and breathe on the internet.

Investors lose real money buying into these rumors.

Fast Forward to May 16

The tentative AMD/Intel deal resurfaced May 16 when the tech website Fudzilla claimed the licensing deal was real, and it was a go. AMD stock jumped almost 12% on the “news”.

Later that day, Advanced Micro Devices held its Investor Day presentation, and it said not a peep about this so-called deal. Intel finally weighed in telling CNBC there was no deal.

Down went AMD stock.

I’m sorry, but I don’t know how anyone can make an investment in a stock that’s so ripe for gossip and speculation. And the worst part is that investors didn’t even bother to consider the value of such a deal to Advanced Micro Devices stock.

“The licensing deal Intel had with Nvidia was reportedly worth $200 million per year in royalties. Presuming any deal with AMD would be similarly sized, such an agreement could add $200 million worth of high-margin revenue to Advanced Micro Devices’ annual top line of around $4.4 billion.” wrote InvestorPlace Feature Writer James Brumley May 16 before Intel squashing the rumors. “From that perspective, even if there was some truth to the whispers, it would be tough to deem the deal a game-changer for AMD or for INTC stock.”

What Advanced Micro Devices and Intel Have in Common

The two companies play in different leagues. Intel has $12 billion in free cash flow compared to $13 million for Advanced Micro Devices. INTC always makes money, AMD rarely does.

However, I happened to be looking over both companies’ balance sheets and realized that there is something the two chip makers share in common that could be keeping investors interested in AMD stock — and it’s not Ryzen 5 or Ryzen 7.

AMD vs. INTC – Balance Sheet

Cash and Investments $943.0M $17.3B
Long-Term Debt $1.4B $20.7B
Net Debt $465.0M $3.4B

Net Debt 

% of Market Cap

4.2% 2.0%

Source: Morningstar.com Financials

Intel might have a bigger balance sheet than AMD, but it’s not necessarily better. While Advanced Micro Devices’ net debt as a percentage of market cap is double Intel’s, it’s still very reasonable.

It’s especially true when you compare it to companies in other industries such as Caterpillar Inc. (NYSE:CAT) and Chevron Corporation (NYSE:CVX) whose net debt as a percentage of market cap is 23.6% and 14.8% respectively.

Bottom Line AMD Stock

Now, I realize this is a bit of an apple to oranges comparison, but I’m only trying to highlight the fact that despite Advanced Micro Devices’ woes, it’s not in a terrible position financially.

If it can figure out how to get the gross margins higher, maybe not Intel higher, but higher nonetheless, AMD stock has a chance to run to $20, something it hasn’t done since 2007.

As I said in my March article about Advanced Micro, I wouldn’t own it, but you could do a lot worse when it comes to owning stocks.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/05/advanced-micro-devices-inc-amd-stock-85-upside/.

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