Advanced Micro Devices, Inc. (AMD) is by all accounts the quintessential battleground stock. There is a group of investors who have owned it for years and are loyal no matter what, and must constantly defend AMD’s honor against the many analysts and a larger basket of retail investors who thought the stock is doomed.
Yet, Advanced Micro Devices stock is now up nearly 75% the last three months, and the company just produced a quarter that its fan club knew it was capable of.
As a result, AMD stock is now 124% above its 52-week low, and Wall Street is finally starting to give it the respect (some think) it deserves. But, what happens now?
Making Sense of AMD Stock
At the end of the day, Advanced Micro Devices’ revenue fell 19% to $832 million, its debt-to-asset ratio rose sequentially and its profit margin was negative 16.5%. By the standard of most, that’s a horrible quarter, so then why did shares jump 50%?
The bullish sentiment has nothing to do with how AMD is performing on a year-over-year basis, or even its profit, but rather what it is doing under new leadership, and how it is positioned for the future.
Yes, weak PC sales are still dragging its Computing and Graphic chips business lower. However, it is forecasting revenue growth of 13% sequentially during its upcoming quarter, and CEO Lisa Su noted new product introductions and design wins as reasons for the bullishness.
Furthermore, Advanced Micro Devices has finally entered the ARM server CPU business with a viable product. While no one knows whether it will steal market share from juggernaut Intel Corporation (INTC), the company’s willingness to try is celebrated by many. When you figure this newfound aggression from management, coupled with its strong guidance versus weak guidance at Intel, some believe the days of Intel taking AMD’s market share at will are over.
A Game-changer for Advanced Micro Devices?
While an earnings beat and strong guidance are nice, it represents just six months of operations. For a company that has struggled for years, six months is really not that long as a confirmation of how it will perform over the long haul.
However, the strong performance does help to boost shareholder sentiment, and the timing of this performance combined with two significant catalysts does suggest that AMD can reach its goal to return to growth and that it can achieve profitability by the latter half of 2016.
One catalyst is that Advanced Micro Devices secured design wins for three different semi-custom processors for new gaming consoles. These wins have the potential to create $1.5 billion in new revenue for AMD in three years’ time.
Perhaps the more meaningful catalyst is a licensing joint venture in China, where Advanced Micro Devices will receive an investment of nearly $300 million upfront. The deal centers around AMD’s recently launched ARM-licensed server CPU, and allows the company to penetrate China’s server market and earn royalties based on the performance.
As previously disclosed, AMD took a chance to target this space and its market leader Intel, and the fact that it won this partnership, and not Intel, is a big vote of confidence for where its server business is headed.
That said, these are certainly game changers for Advanced Micro Devices the company, and might very well be the same for its stock. However, after such large gains, AMD is now in the “show me” stage of its business.
The fact that it now trades near 52-week highs is a reaction to all of this good news, but now Advanced Micro Devices needs to deliver with the bullish guidance it provided, and the profitability to improve the state of its balance sheet.
Whether it succeeds will be a reflection on how well Advanced Micro Devices performs in the server market, China and if those design wins materialize into actual revenue. If so then yes — AMD stock is very cheap and a great investment opportunity.
Unfortunately, it is too early to form such conclusions, and that’s why investors are best off sitting on the sidelines, or even waiting for a better entry point. Only then would it be wise to invest in AMD stock.
As of this writing, Brian Nichols did not own any of the aforementioned securities.
