Here's Why AMD's on a Roll

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It's been a long, bumpy ride for AMD (NASDAQ: AMD  ) shareholders in 2012. Even after some much-needed relief the past week, AMD's share price is down over 58% year to date. It's not hard to explain AMD's downturn -- a declining PC market, a management team slow to adapt to an exploding mobile marketplace, and burning cash to pay for day-to-day operations is enough to scare the most avid of fans.

Explaining the rationale behind investors' recent exuberance takes a bit more doing. Sure, there are several newsworthy items AMD bulls have glommed onto, but do these really warrant this week's jump of 20% in share price? You be the judge.

Recent happenings at AMD
Whether you're an AMD bull or bear, the Dec. 3 announcement that AMD intends to sell and lease back its Texas campus is worth consideration. Bulls are quick to point out that when the deal closes, AMD will pocket an estimated $150 million to $200 million in much-needed cash. Plans are to complete the transaction, and have the proceeds available to help pay operating costs, by Q2 of 2013.

For AMD bulls, the Austin, Texas real estate deal demonstrates the depth of its financial woes. Clearly, AMD isn't in the commercial real estate biz, nor should it be, but selling assets as a stop-gap measure to pay overhead? That's disconcerting, to say the least.

Speaking of stop-gap measures, fellow Fool Evan Niu discusses another AMD share price driver this week in this recent article. The gist of Evan's article is that AMD investors are placated -- bullish, even -- by the knowledge that one of its primary shareholders, Mubadala Development, almost has to bail AMD out financially because of its 19% stake. Apparently, that's a good thing.

The $334 million deal to acquire SeaMicro, announced in early March of this year, is beginning to show signs of life. AMD announced its SeaMicro SM15000 is Citrix-ready, and was verified as such by Citrix. Whether the results of AMD's collaboration with SeaMicro become a game-changer, only time will tell. If nothing else, the SM15000 confirms AMD is leveraging its investment in SeaMicro, expanding beyond its reliance on the PC market, and further penetrating data centers.

Upgraded processors for use in cloud computing were also announced recently, reinforcing AMD's commitment to target growing markets, and adding fuel to its positive stock price movement of late.

And now, for some reality
As detailed in AMD's rather depressing Q3 earnings announcement, there are definitive plans to reduce overhead, including shaving $190 million in expenses, primarily through a 15% reduction in AMD's workforce. Drastic? Perhaps, but it needs to happen when operating cash flow is at a premium, as it is with AMD.

AMD's goal to break even on an operating cash flow basis, equal to $1.3 billion quarterly, is a key piece of its "business model." Makes sense, particularly as AMD carries over $2 billion in long-term debt. What's concerning about AMD's business model is the target date for breaking even on a cash flow basis -- it's this time next year. AMD needs an entire year of dramatic cuts and operational improvements to generate enough cash to even pay overhead? Is that a hole AMD's in -- or a grave?

Concentrating on growth markets – including cloud and mobile computing – is the right direction for AMD. Problem is, it's a crowded field, and everyone has a big head start. Qualcomm (NASDAQ: QCOM  ) , Ericsson (NASDAQ: ERIC  ) , and NVIDIA (NASDAQ: NVDA  ) began supplying mobile computing and smartphone manufacturers early on. Qualcomm and NVIDIA, in particular, are examples of the bucking the processor manufacturing trend of declining sales.

According to IHS, both Qualcomm and NVIDIA will grow processor revenues in 2012: Qualcomm by over 27%, NVIDIA by just under 9%. AMD? According to the IHS study, 2012 will show a 17.7% decline, thanks to the PC market. As for Ericsson, its smartphone patent portfolio alone makes it a force to be reckoned with. Just ask Samsung, the target of a recent patent infringement lawsuit filed by Ericsson.

Like AMD, Intel (NASDAQ: INTC  ) was also late to the cloud and mobile computing party, but still beat AMD to the punch on virtually every front. Including, cloud computing, servers, data centers, and most every other non PC-related market. For investors, a big difference between the longtime competitors is Intel's sound financial position, and its impressive 4.5% dividend.

There's a lot going on at AMD, including its recent jump in stock price. Unfortunately, there are still too many questions, and not enough answers.

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Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On December 05, 2012, at 10:35 PM, rav55 wrote:

    AMD has all three game console design wins. WiiU, PS4 and XBOX whatever they call it.

    That is 15-17 million unit sales per year given past sales history of consoles and that should be worth $0.9-1.2 Billion in sales.

  • Report this Comment On December 05, 2012, at 11:06 PM, TEBuddy wrote:

    AMD is a leader and had plenty of superior Opteron offerings than Intel for virtualization, cloud computing, data centers. AMD is pushing its processors into embedded markets. And their latest desktop line even rivals Intels i7s in many multi-threaded metrics. AMD is on the right track, as long as the 2013 releases are on time. AMD's Tamesh should be out first quarter to take tablet space away from Nvidia and Intel. It will make Intel Atoms in netbooks and tablets obsolete. If Steamroller based notebook APUs are release mid-year then AMD has a real fighitng chance there, while the Trinity line is still doing alright, making penetration into HP business and consumer line and several new ASUS, MSI, Lenovo and Samsung notebooks.

    Seeing that AMDs latest offerings actually come out ahead against i7s in some cases, an 8-core steamroller based processor will be very exciting if released mid year. Intel will be quick to get more 6 and 8-core offerings to stay ahead.

  • Report this Comment On December 05, 2012, at 11:22 PM, timbrugger wrote:

    rav55 & TEBuddy,

    Good points, all.

    Unfortunately for AMD shareholders, having competitive, and sometimes even industry leading, processors and related products hasn't translated to its financials. If you're long AMD, here's hoping its able to translate its technology to the bottomline.

    Thanks for the excellent insights/posts, Tim.

  • Report this Comment On December 06, 2012, at 12:09 AM, rav55 wrote: hindsight observation is not quite accurate.

    AMD was on a roll until the economy knocked the pins out of everyone except the fondle slab makers.

    But sales is king. I believe that AMD is priced now extremely low for the sales numbers that the consoles wil bring. Of course analysts don't prognosticate, much. And don't buy on rumour, much.

    One small point. Nintendo, Microsoft and Sony are banking their $100 billion dollar game console market future on AMD. That makes AMD a very attractive acquisition for private equity, say Mubadala? They already own 19% of AMD, at the market price they could easily take a majority share for a few hundred million.

  • Report this Comment On December 06, 2012, at 12:35 AM, kthor wrote:

    AMD has better products than Intel ... but people rather spend more on products they don't need because they think the higher the price the better the product is ..

  • Report this Comment On December 06, 2012, at 12:44 AM, jhf678 wrote:

    AMD has reached the bottom, but Nvidia is about to reach it because Tegra is not in major smatphones like Qualcom. AMD just picked up a winner in Nintendo Wii BD, which is sold out in US and other countries are to follow. Gaming graphic HD is in huge demand. It is a good start for AMD.

  • Report this Comment On December 06, 2012, at 12:55 AM, TEBuddy wrote:

    AMDs latest penetration into supercomputing GPUs is also very exciting for them. Think of the revenue and margins on a even just one AMD Opteron supercomptuer running AMD FirePro GPUs. The FirePro S10000 is AMD's first serious jump into professional graphics that challenges both Nvidia Quadro and Tesla in one GPU. Already in the most efficient supercomputer in the world.

  • Report this Comment On December 06, 2012, at 1:00 AM, rav55 wrote:

    Smart Phones and Tablets have told the consumer that they do not need to calculate pi to a billion decimal points in a microsecond. What they want is a graphical user interface that rocks. Intel can't provide that s their graphics don't suck enough, but AMD Radeon Fusion APU's can. When tablets move to the x86 Windows 8 Pro environment en masse then AMD will gain market share.

  • Report this Comment On December 06, 2012, at 4:10 PM, rav55 wrote:

    Intel made quite a bit of noise about Xeon Phi. Evidentlly Xeon Phi is the uber-accelerator. NOT. Well maybe in Intel's dreams. Phi delivers just a tad over a teraflop double precision. But AMD S10000 delivers 1.48 teraflops double precision.

    Out of the gate Intel FAILS miserably to AMD.

    Intel Phi = 300 watts

    AMD S10000 = 375 watts

    AMD BEAT Intel again.

    AMD IS a huge innovator.

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