At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
By all rights, happy days should be here again for Advanced Micro Devices (NYSE: AMD ) shareholders. Yet despite receiving an upgrade from Wall Street wizard Broadpoint.AmTech yesterday, the stock actually fell some 3.7% -- twice as hard as the rest of the Nasdaq. Is there a reason investors seem to distrust Broadpoint's optimism about the stock? Well, let's consider:
- There's the "$1.25B settlement" AMD's due to receive from Intel (Nasdaq: INTC ) , of course.
- And while Intel's money flows in one door, "AMD's debt of ~$3.7B" is flowing out the other, with Broadpoint projecting a 25% reduction in debt load, along with a 20% decline in annual interest payments as AMD restructures its debt.
- Plus, "revenue growth in the coming quarters will prove to be stronger than the Street is modeling, driven by" new, Microsoft Windows-inspired PC purchases, advantages inherent in the "Evergreen GPU platform," and a revitalized AMD marketing campaign.
All of this adds up, in Broadpoint's mind, to a valuation picture where the "risk/reward is now compelling" – and an upgrade from "neutral" to "buy." But none of this explains why investors should be feeling so sour on AMD. So what gives?
Let's go to the tape
Here's what gives: Broadpoint owns the dubious distinction of being -- simultaneously – both one of the most prolific pickers of semiconductor stocks ... and one of the worst. Over the course of some 88 separate buy/sell recommendations in the sector, made over the past three years, Broadpoint has managed to guess wrong nearly 60% of the time. A few examples:
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Stock
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Broadpoint Says:
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CAPS says:
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Broadpoint's Picks Beating (Lagging) S&P By:
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NVIDIA (Nasdaq: NVDA )
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Outperform
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****
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97 points [four picks]
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|
MEMC Electronic (NYSE: WFR )
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Outperform
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*****
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(55 points)
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Sigma Designs (Nasdaq: SIGM )
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Outperform
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*****
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(7 points) [two picks]
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|
RF Micro Devices (Nasdaq: RFMD )
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Outperform
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****
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(11 points)
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Applied Materials (Nasdaq: AMAT )
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Outperform
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****
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(16 points)
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So you can see why investors might be just a wee bit skeptical about Broadpoint's bullish prognosis on AMD. According to the analyst, AMD's improved balance sheet and newly signed peace treaty with Intel means will we should not see: "a price war with Intel, but a feature/performance battle at already established market price points."
Or not ...
Maybe Broadpoint's right. But I can't help noticing that the analyst's record on these twin titans of semiconducting in particular is actually worse than what we've seen it do elsewhere in semi-stocks. Broadpoint has underperformed the market on its recommendations of both Intel and AMD (by nine, and 20 points, respectively.)
I also can't help but notice that AMD hasn't fared awfully well in its past contests with Intel. Over the past five years, AMD has averaged $850 million in negative free cash flow per year. Over the past 12 months, the company burned through $1.3 billion in cash. And while Broadpoint tells us AMD's debt situation is looking up, my reading of the SEC filings shows the company actually has not $3.7 billion, but $5.3 billion in debt (versus $2.5 billion cash and equivalents, and Intel's $1.2 billion on the way). Seems to me, that leaves AMD still $1.6 billion in the hole, versus a cash-rich Intel.
Foolish takeaway
Do recent developments weaken the ursine case against AMD? A bit, yes. But this bear's still got plenty of teeth. Unprofitable, burdened by debt, and burning cash, AMD remains an also-ran next to its archrival. None of which sound to me like good reasons to buy the stock.
But they're great reasons to sell.
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