AMD vs. Cisco: AMD

In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!

I'm defending the honor of microprocessor designer Advanced Micro Devices (NYSE: AMD) today. It's not hard to fight for such a massively misunderstood and thus hugely undervalued stock, regardless of the high esteem I hold for Cisco Systems (Nasdaq: CSCO), my opponent in this round.

Here's the short and sweet on AMD's stock market woes: People are overreacting to long-expected news, and particularly to the effects of that infamous price war with Intel (Nasdaq: INTC). AMD's latest earnings report wasn't very flattering, because of the costs of integrating recently acquired graphics-chip maker ATI. Gross margins are suffering from that price competition, and the larger rival currently holds the top-end performance crown to boot.

But all of that adds up to nothing more than a delicious buy-in opportunity. AMD is getting close to releasing its native quad-core processor, code-named Barcelona, which promises to turn that performance tide, at least in high-end server applications. In the meantime, the Opterons and Athlons arguably outperform Intel's Core processors on the increasingly important performance-per-watt metric. And the company is doing better financially than a first blush would indicate.

AMD recorded a $167 million GAAP net loss in 2006, but a large part of that result came in the form of non-cash charges such as depreciation and amortization, and acquisition-related writeoffs. Operational cash flows of $1.3 billion for the year tell a different story, and they explain how AMD can dare to invest in its future by building manufacturing plants and upgrading its process technologies in concert with IBM (NYSE: IBM). I can think of worse technology partners, by the way.

So in short, Cisco is a fine stock, but you can't get it at anywhere near the mind-blowing discount applied to AMD's stock these days. The cycle will soon turn again, and Intel won't keep a lid on its prices forever. And that balance sheet will get stronger as more cash flows, um, flow in. Take a position today, and watch it double in a year -- and then get cut in half again, and come back up stronger than before.

Such is the life of a tech stock that's always evaluated from a short-term perspective. And right now is the time to profit from those mood swings.

Does this stock deserve to move on to the next round? If you think so, simply follow this link and rank the stock "outperform" in Motley Fool CAPS. If not, vote it "underperform." Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.

Click Cisco to read the opposing entry in this contest.

Click here to read all of the other articles in the tourney.

Do you think you could pitch your favorite stock -- or ditch your least favorite one -- in less than 27 seconds? That's what we're doing over at Motley Fool CAPS. Check out our new stock videos.

Intel is a Motley Fool Inside Value pick, because that price war cuts both ways. Read all about it with a free 30-day trial pass.

Fool contributor Anders Bylund is an AMD shareholder, but grudgingly holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is worth its weight in strained silicon.