AMD Must Deliver On This Promise to Survive 2014

Shares of Advanced Micro Devices (NYSE: AMD  ) surged 61% higher in 2013. The processor designer easily crushed the S&P 500 benchmark index, while chief rivals Intel (NASDAQ: INTC  ) and NVIDIA (NASDAQ: NVDA  ) struggled to keep pace with the market. Can AMD keep the fires burning in 2014?

AMD Chart

AMD data by YCharts.

Before looking ahead, let me just remind you that AMD's 2013 jump was more of a bounce off the bottom than a healthy growth story. The stock plunged 57% in 2012 and AMD's trailing earnings haven't been positive since 2011. This is a turnaround story in the making, with all the tremendous potential gains and huge operating risks that entails.

That said, Wall Street analysts do expect AMD's turnaround story to continue. The average forecast for 2014 points to adjusted earnings of $0.12 per share, up from a $0.12 estimated loss per share in 2013. Revenue is supposed to spike 11% higher this year, which would be AMD's strongest annual sales growth since 2010.

Jefferies analyst Mark Lipacis supported his optimistic forecast this way: "We hosted client meetings with AMD's CFO over the last two days, and left thinking the Street was not giving credit to AMD's gaming solutions, nor to AMD's potential to win back share in both notebooks and discrete graphics."

So AMD's future isn't completely chained to the ailing PC market. Lipacis noted opportunities for AMD to steal market share from NVIDIA in graphics and from Intel in notebook systems, but the "gaming solutions" comment hints at a larger trend.

AMD may not design chips for smartphones and tablets, but the company did produce semicustom chips for all three of the next-generation gaming consoles. And outside the attractive but relatively low-volume console market, AMD is open to designing custom solutions for any embedded computing situation. Two years ago, only 5% of AMD's sales weren't tied to PC systems; today, that ratio has surged to 30% as AMD diversified. Expect this trend to continue.

So AMD is looking at a fine opportunity to execute on the semicustom market in 2014. To do that, the company must spread the word of its custom design services and win the trust of the world's major electronics manufacturers.

But it's a race against time. AMD is burning cash in almost every quarter and not paying down a crushing debt load that results in $178 million of annual interest payments. The company operates with five times more debt than shareholder equity.

AMD's dwindling cash reserves won't last forever, and banks might grow tired of underwriting big loans to this cash-burning company. If AMD's turnaround doesn't accelerate into reliable cash profits in 2014, the company might be done for.

AMD Free Cash Flow (Quarterly) Chart

AMD Free Cash Flow (Quarterly) data by YCharts.

This is an extremely high-risk and high-reward situation, sink or swim, and it's better suited for gamblers than serious investors. If you simply must buy AMD shares today, make sure to stick to an amount you could afford to lose.

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Read/Post Comments (8) | Recommend This Article (3)

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 January 02, 2014, at 11:45 AM, kjurden wrote:

    I don't think any investors are listening to you...if you hadn't noticed, while you were writinig this "FOOLISH" article, most of the investment community is buying AMD stock. Why? BECAUSE AMD IS DELIVERING ON THEIR PROMISE! LOOK AT ALL OF THE NEW PRODUCTS AMD HAS RELEASED. AMD IS BEGINNING TO TAKE BACK MARKET SHARES FROM BOTH iNTEL & NVDA...RORY REED HAS DONE AND IS CONTINUING TO DO A MARVELOUS JOB AT THE HELM OF AMD.

    SO, CONTINUE TO BE "FOOLISH", AVOID BUYING AMD STOCK, AND LET THE SAVVY INVESTOR MAKE THE PROFIT AS AMD RISES 4X IT'S PRESENT SHARE PRICE.

  • Report this Comment On January 02, 2014, at 8:13 PM, masterwallstreet wrote:

    In my opinion only, I find your article to be very foolish. I know professional writers and analysts are entitled to their opinion. Like investors, I am entitled to my opinion. Unfortunately I do not get paid for it. Some of these analysts do not get the big picture. They leave out crucial info. They try to put fear in the stock when it is rising. The writer might have his own agenda. Is it possible that the writer is shorting the stock? He might be about to get burnt. Opinions are like a-holes. Everyone has them. Unfortunately these so-called writers have the biggest a-holes especially when they make the stuff up out of thin air. I find this article to be full of BS. It is my 2 cents worth.

  • Report this Comment On January 02, 2014, at 8:31 PM, bluesky64 wrote:

    kjurden and masterwallstreet very well put.

    This guy must be short and in a very big way.

  • Report this Comment On January 02, 2014, at 8:40 PM, bobbie wrote:

    Anders Bylund is a fool and hired by the two young finders of Motley fool. They pick these guys so it's just a small opinion group hired by them.

    so, you can see were the real fools are in all this, management. lol Bobbie

  • Report this Comment On January 02, 2014, at 9:28 PM, superunature wrote:

    everyday it's the same thing

    motley fools vs seeking alpha on AMD

    seriously, by now, there is no one that dosen't know the current situation with AMD.

    with the exact same information you write everyday just reworded.

    please find something useful to write about.

  • Report this Comment On January 02, 2014, at 11:30 PM, rg14 wrote:

    Author says: "AMD's dwindling cash reserves won't last forever, and banks might grow tired of underwriting big loans to this cash-burning company. If AMD's turnaround doesn't accelerate into reliable cash profits in 2014, the company might be done for."

    What is he talking about? Which bank would not like to dish out loans and receive $178 million annually? In case the author does not realize this, that is kinda the bank's business model !!!

  • Report this Comment On January 03, 2014, at 10:36 AM, TMFZahrim wrote:

    @rg14, not so attractive for the bank if the company can't repay the loan, let alone cover its interest payments.

    @bluesky64, I have no position in AMD but I do own Intel, if that counts. Short? I'm 6'5"!

    Anders

  • Report this Comment On January 03, 2014, at 11:50 AM, KenLuskin wrote:

    AMD has POSITIVE OPERATING CASH FLOW in Q4.

    The Console earnings are ALL FREE cash flow.

    AMD will generate OVER $500 MILLION FREE CASH FLOW in 2014 based upon:

    1) SOLD OUT Consoles

    2) SOLD OUT APPLE MAC Pros

    3) SOLD OUT high end DISCRETE GPUs

    Wall st is CLUELESS about AMD's surging discrete GPU sales and resulting profits.

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