Has AMD Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Advanced Micro Devices (NYSE: AMD  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at AMD.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(1.5%)

Fail

 

1-year revenue growth > 12%

(17.4%)

Fail

Margins

Gross margin > 35%

35.8%

Pass

 

Net margin > 15%

(21.8%)

Fail

Balance sheet

Debt to equity < 50%

379.6%

Fail

 

Current ratio > 1.3

1.62

Pass

Opportunities

Return on equity > 15%

(111.2%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at AMD last year, the company has dropped two points, as the company has gone from a profit to a substantial loss. The stock has also performed horribly, having lost more than 60% of its value in the past year.

Right now, AMD is suffering from the worst of two different worlds. On one hand, it hasn't succeeded in providing a serious challenge to Intel (NASDAQ: INTC  ) in its core PC market. Yet at that the same time, it also hasn't managed to find a substantial niche in the mobile-chip market, as intense competition there threatens to leave it behind in the tablet and smartphone space.

As a result, AMD has had to resort to extreme measures to produce cash. Last month, the company did a sale-and-leaseback deal to free up $164 million in cash from its Texas business campus.

How AMD plans to turn itself around is still a mystery at this point. Last week, AMD vice president Roy Taylor suggested that having its chips in the latest versions of gaming consoles could spark a renewal for the company, but as Fool contributor Alex Planes noted yesterday, it's highly uncertain that those consoles will themselves be successful enough to drive AMD higher. Still, investors seem to be clinging to that hope, as the stock jumped 13% on Monday after reports that Microsoft (NASDAQ: MSFT  ) would use AMD chips in its new Xbox console, which would be a reversal from the company's previous use of Intel architecture.

In order to improve, AMD needs to find a more substantial financial lifeline and work to find a viable segment of the chip market in which to survive. Otherwise, AMD's move away from perfection is likely to continue for the foreseeable future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

AMD knows all too well that when it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Click here now to learn more.

Click here to add AMD to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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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 April 11, 2013, at 12:13 PM, rav55 wrote:

    Selling 20 million APU's at $60 per copy to Microsoft and Sony will certainly do just a little to spark a return to profitability.

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