Is AMD a Buy Now?

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I'm a longtime shareholder of Advanced Micro Devices (NYSE: AMD  ) , and my portfolio has absolutely enjoyed this stock's 200% rise over the past 12 months. But would I buy AMD again today? Not necessarily.

One-time victories aplenty
AMD has enjoyed a few victories lately that will not be repeated. Chief among them is the $1.25 billion settlement payment from Intel (Nasdaq: INTC  ) for a decade of allegedly dirty business practices. The successful separation of chip design and manufacturing operations has lightened the load on AMD's balance sheet considerably. And main graphics rival NVIDIA (Nasdaq: NVDA  ) has run into execution problems around the upcoming Fermi architecture, giving AMD's ATI division the upper hand in that eternal bout of dueling dragons.

All of this is great news for AMD investors -- but mostly for those of us who owned shares before each item hit the newswires. The settlement windfall, the graphics sea change, and the new operating model have all seemingly been priced into AMD's share price already. You can't count on any of these factors to repeat themselves and feed AMD's business in the future. The company can boast positive free cash flow in the past 12 months, but take away the Intel payment and we're way back in the red.

So I should sell?
Hold your horses, cowboy! Just because AMD won't win legal battles every quarter doesn't mean that the stock is an absolute sell now.

Under CEO Dirk Meyer, AMD has tightened its belt considerably. Expenses are tight, the company has stuck closer to product road maps, and AMD chips make sense for uses ranging from the data center to your laptop these days, even in the face of what is arguably Intel's strongest chip lineup ever. According to market researcher IDC, the underdog is taking market share from Intel in all three of the major markets -- server, laptop, and desktop systems -- while the total market is also expanding rapidly. There's a lot to like about what AMD is doing these days.

And I'm not alone in saying so. AMD is building steam among Wall Street analysts, where buy recommendations on the stock now outnumber the sells, eight to six. Broadpoint AmTech analyst Doug Freedman put a $12 price target on AMD in January (since raised to $14), reasoning that the company is gaining share in attractive markets like server chips and graphics products. That's better than a 25% premium to today's stock price. BroadpointAmTech's appraisal of AMD is among the most optimistic you'll find on Wall Street, but the firm does make a reasonable case for it.

Come on, already! Buy, sell, or hold?
For me, AMD is a hold almost by default. I write about the company very often, so the Foolish disclosure policy kind of shackles me to these stock certificates.

But that's almost beside the point, because I think that AMD is close enough to the stock's honest-to-goodness value anyway. If you agree wholeheartedly with the $12 value per share outlined above, which assumes forward earnings of $0.67 per share plus a bit more value unlocked from the manufacturing bifurcation, you still have to hang on for a while to reach that price. The Wall Street weighing machine can be a very bumpy ride, and risk-averse investors may want to look elsewhere.

In purely Foolish terms, I can understand why AMD is not recommended by any of our premium newsletters. The stock is too large and widely followed to be a Motley Fool Hidden Gems selection, too similar to market leader Intel to qualify as a Rule Breaker, and so on. And when AMD was truly cheap last year, it was still too risky to attract the roving eye of Philip Durell and his value hounds.

Even if you're dead-set on investing in semiconductor stocks, you can find another one that fits every pure strategy better. Intel or Texas Instruments (NYSE: TXN  ) are the more classic value plays right now, and Texas Instruments even pays a dividend; Sigma Designs (Nasdaq: SIGM  ) and Cypress Semiconductor (NYSE: CY  ) play better to the extreme growth crowd with tons of untapped potential; and Atheros Communications (Nasdaq: ATHR  ) is a small fish in a rapidly growing wireless communications pond, and the stock can't be stopped. All of these investment theses are probably stronger than the case for a long-term 30% gain you could construct for AMD.

AMD's ace in the hole is the expensive ATI buyout, which leads to the Fusion philosophy and entirely new thinking about computer architecture. That story arc comes to fruition next year, which explains why many analysts expect to see AMD's earnings turning positive all of a sudden. Patience pays.

Last call for advice
AMD may yet return to the $20 to $40 range seen in the glory days of the Athlon processor, but that will take years and is not easy money by any means. The balance sheet is looking better day by day, and net profits are in the cards -- for 2011. It's not a terrible stock, and I'm happy to hold it even without our disclosure requirements, but I'm not backing up the truck to buy more unless AMD takes another nosedive for no reason first.

That's my $0.02. How about you? Give AMD a proper rating in Motley Fool CAPS and use the comment box below to share your motivation.

Fool contributor Anders Bylund owns shares in AMD, but he holds no other position in any of the companies discussed here. Intel is an Inside Value recommendation. Cypress Semiconductor and Sigma Designs are Rule Breakers selections. NVIDIA is a Stock Advisor pick. Atheros Communications is a Hidden Gems choice. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended a buy calls position on Intel. The Fool owns shares of Atheros Communications. Try any of our Foolish newsletters today, free for 30 days.You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (9) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2010, at 4:02 PM, SUPERMANSTOCKS wrote:

    AMD was a steal 1.00 ago! Where have you been?

  • Report this Comment On March 24, 2010, at 4:41 PM, Supertapir wrote:

    Have you seen the market-expectations? they all agree that the notebook market will almost double in a couple of years and thats why I see no reason why the stock should not explode in the next 1-2 years. The day will come that AMD will escape out of Intels shadow and than we should look for the >100s +! There are three no CPU families coming next year (Bulldozer, Bobcat and Fusion) and I see AMD in market share gaining mode for the coming years. It is like Benz and BMW or Pepsi and Coke. AMD will rule!

  • Report this Comment On March 24, 2010, at 4:44 PM, Supertapir wrote:

    AMD rocks! Three new architectures next year! Market share gaining mode! Market will almost double in next three years according to all market wathcers! What are you wating for?

  • Report this Comment On March 24, 2010, at 5:24 PM, actue wrote:

    I know AMD stock has appreciated substantially over the last year. The question is "why". The last time AMD actually made any money was so long ago I can't remember. They don't lose just a little bit, they lose hundreds of millions and sometimes billions. Doesn't a company have to make at least some money eventually. At some point everyone will realize that. They will blow through that Intel money in 5 or 6 quarters and then have to attempt to pull some other rabbit out of a hat. My guess is that the Global Foundries deal will be blowing up about that same time and create a real fiasco. That could create problems for Intel because they need AMD as a pretend competitor.

    Also, your comments about AMD gaining market share are bogus.

  • Report this Comment On March 25, 2010, at 12:24 AM, amando007 wrote:

    AMD rocks! -I´m from germany, and i know why intel payed "little" money to AMD. -Because here in germany Intel payed the shops to have only intel computer´s. The names of this shops are "Media Markt" & "Saturn" -And Media Markt exists all over europe. -It´s a very big market which AMD loose here for this corupt things...Sorry for my english...

  • Report this Comment On March 25, 2010, at 10:09 AM, joroi wrote:

    Anders, excellent article. It is rare, for some reason, to see AMD covered.

    There are couple of points I like to address.

    First, what is different with this AMD compared to AMD of '06-'08 is the focus on execution. I've followed the company (both AMD and ATI) since 2004 and have not seen it so focused on execution. They were able to roll out 2 generations of chips (with possibly a 3rd in the wings) before NVDA could get 1 out.

    Second, not only does AMD execute well, but it has a plan too. The company correctly decided that they don't have the balance sheet strength to compete in manufacturing and spun that off. Rather than follow NVDA and Intel in small-form chips and stretch its limited resources thin, it sold that division off. Their strategy apears to be a focus on the core GPU/CPU market.

    There's a lot to be said for a company that has a plan and executes it well. It is not a one-time event - it is a cultural shift that's longer-lasting.

    As for valuation, I believe the company to be undervalued currently. They are no longer selling low-priced SKUs in the graphics segment. Pricing in the CPU segment has also recovered. I believe we will see a 12% uptick in overall margins this quarter and an over 30% uptick in sales. The company's market cap does not reflect it's market share position or its much-improved profitability. I see a price of $18 in two years based model's computation of intrinsic value.

    Just my 2 cents.

  • Report this Comment On March 25, 2010, at 12:09 PM, TEBuddy wrote:

    The next huge cash in will be AMD's share in Global Foundries, which is about to be the second largest semi corporation. Second only to TSMC. AMD makes chips at TSMC for graphics, and TSMC has been a bottleneck in some ways, especially for Nvidia. Now costs will drop when GF has the capabilities. And GF will buy back the AMD share or offer it publically and AMD will make a killing on that sale in a couple years.

    If for those people with actual knowledge of how stuff works, both foundry wise and chip performance wise, know the value of AMD. Their products are robust, and perform better in many real world scenarios. Intel has good stuff too, they both do, but that doesn't mean AMD's is not just as good at some things and better at others.

    The introduction of the latest Opteron processors will boost margins, and Intel's not looking to break the pact and try to sell things at cost to snub AMD out. Intel's Nehalem architecture is too complex and expensive for them, and Intel will dump it ASAP.

    AMD no longer pays any royalties to Intel as well, since their recent legal settlement. Intel uses AMD technology all the time, following in AMD's footsteps the last decade. All should thank AMD for driving the age of innovation and making all that we have today affordable.

  • Report this Comment On March 25, 2010, at 4:04 PM, libra4stock wrote:

    TEBuddy is very to the points. After the recent settlement, without foundry restriction and royalties, AMD breaks free to compete.

    Anders, study the past to learn from mistakes people made, but study the future POTENTIAL to invest.

  • Report this Comment On March 25, 2010, at 7:55 PM, KurtLiquor wrote:

    AMD is a table pounding buy. Revenues are increasing and expenses are dropping. AMD will report positive earnings in 1Q 2010 and surprise.

    AMD is trading in the low nines as I type this. I predict AMD trades in the 18's by 4Q 2010.

    Numerous reason's...

    1) AMD doesn't have to pay licensing fees to Intel.

    2) AMD has the best Graphics software and hardware.

    3) AMD's chips are among the best, most advanced and least expensive.

    4) AMD's management is profit motivated and makes sound decisions. The Intel "fraud payment" of $1.25 billion was used to lower debt adding 5 cents per share on an annual basis.

    5) Intel has promised to stop sabotaging AMD chips and causing AMD chips to malfunction.

    AMD future profitability and growth in share should be impressive, not only because of the absence of Intel sabotage but also because of growth of AMD acceptance worldwide and growth in demand for AMD chips.

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