Why Advanced Micro Devices Should Outperform Intel

Assuming PC sales rebound, is Advanced Micro Devices (NYSE: AMD  ) or Intel (NASDAQ: INTC  ) a better buy? The answer is AMD, and here's why.

What's good for Intel and Micron is also good for AMD
For the second quarter, Intel is projecting revenue of $13.7 billion, which is about $700 million higher than the previous midrange guidance of $13 billion. In addition, it also expects some revenue growth for the full year, up from a prior estimate for flat sales. This is a sign that PC sales are on the rebound. 

But Intel is not the only sign that PC sales are coming back. Bank of America Merrill Lynch upgraded Micron Technologies (NASDAQ: MU  ) from an underperform to a buy rating, with a price target of $40 a share from a previous $22. One of the reason for this aggressive upgrade was "a favorable chip pricing environment as a result of relatively tight supply." 

So, if the general climate is good for Intel and Micron, it should also be good for AMD.

AMD's revenue has been going up despite lower PC sales
Lower PC sales aside, AMD's revenue has been going up mostly because it is the core technology provider behind Nintendo's Wii U, Sony's PS4, and Microsoft's Xbox One.

And if AMD's CFO Devinder Kumar is correct -- at a recent BoA Merrill Lynch technology conference, he said console life cycles "are probably going to be shorter" -- that might mean higher churning in the console space and more business for AMD longer term.

AMD has many other things going for it that should sustain its current revenue trajectory. For example, Mark Papermaster, AMD's chief technology officer, said that AMD aims at a 25-fold improvement in the energy-efficiency of its products by 2020, using a series of design techniques that go beyond those that have historically come from shrinking transistors on chips.

AMD isn't aiming just at reducing power consumption, but also boosting computing performance at the same time. That combination could help drive AMD's chips, which are now mostly in laptop and desktop PCs, into more tablets and smartphones. Sam Naffziger, an AMD researcher, sees about a five-fold increase in computing capability for the typical laptop while drawing about one watt of power, down from five watts or so today. That means typical battery life would go far beyond the current typical maximum of eight to 10 hours, to several days, claims Naffziger. 

AMD's leveraged balance sheet has been holding the stock back
One of the problems with AMD is that it is highly leveraged, meaning it has a very high debt-to-equity ratio -- currently standing at 4.18. On the plus side, however, most of this debt is long term, and the company does not face any liquidity problems. The quick ratio currently stands at 2, which is very healthy.

AMD Debt to Equity Ratio (Quarterly) Chart

AMD Debt to Equity Ratio (Quarterly) data by YCharts.

So, how will leverage help AMD perform better?
Let's say an omnipotent being tells you the S&P 500 index will climb to 5,000 in the next six months. Obviously, if you buy an ETF that follows the index, you will do good, but why not do better? If you know for a fact that the Index will go that high, why not buy the most leveraged ETF you can find? In fact, why not buy the most leveraged ETF you can find -- and double up on margin also? This is basically the reason AMD will perform better than Intel if PC sales come back.

If PC sales come back and AMD's revenues continue to rise (as has been the case over the past several quarters), that will help the company became profitable and lower its debt. If that happens, then it should perform better, because AMD is trading at depressed levels because of its high debt load. 

AMD PS Ratio (TTM) Chart

AMD PS Ratio (TTM) data by YCharts.

One way to chart just at how depressed AMD is trading compared to Intel is the price-to-sales ratio.  As you can see in the above chart, Intel's price-to-sales ratio stands at 2.9, where AMD's is 0.55.

If AMD can fix its balance sheets issues over the next several years, then the market should view the stock more favorably, and AMD should trade more along the lines of Intel relative to its revenue (if it lowers its debt, that is).

So, how much can AMD outperform Intel, assuming PC sales will continue to improve, and assuming AMD can lower its debt? In theory, if AMD trades similar to Intel on a price-to-sales ratio basis in the future, it has to increase fivefold to trade on par with Intel. So if PC sales come back, think of AMD as an option that never expires in the PC space.

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Read/Post Comments (11) | Recommend This Article (2)

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 June 24, 2014, at 7:28 PM, SnarfJabroni wrote:

    If...if.....if......if ifs and buts were candy and nuts.

    IF is not a great investment strategy.

  • Report this Comment On June 24, 2014, at 10:50 PM, wownwow wrote:

    Significant ROI can only be made by:

    1) Insider information, then preparing for jail time.

    2) Educated (informed and digested) anticipation, surely there is no guarantee and guarantee ~= minimum.

    IF is not a great investment strategy, but educated IF may catch people as a surprise and provide a significant return.

    Putting money the banks and letting other people use it won't have IF but a guarantee minimun return.

  • Report this Comment On June 25, 2014, at 5:48 AM, rav55 wrote:

    "IF is not a great investment strategy."

    "IF" is why the market exists. If money is invested then maybe a profit is earned.

    You can't win IF you don't play.

  • Report this Comment On June 25, 2014, at 7:58 AM, Stuart511 wrote:

    snarfi,

    so "if" I understand your comment, "if" I don't invest my cash and leave it in the bank and earn 1% interest/.5% after tax, but "if" I do invest in the market, and "if" I choose the correct stocks I may earn more than 1%?

    Snarfi, I thank you for your advice, you just made my day!

    "If" and "when" (which could develop another comment here) I do invest and "if" I make a profit, I will thank you in advance for more of your savvy investing advice :)

    Good luck to all!

  • Report this Comment On June 25, 2014, at 11:36 AM, jozie28 wrote:

    Shouldn't the disclosure at the end say that the Motley Fool recommends AMD? Or are there just too many " If " scenerios....

  • Report this Comment On June 25, 2014, at 12:21 PM, wownwow wrote:

    @Author.

    "Sam Naffziger, an AMD researcher, sees about a five-fold increase in computing capability for the typical laptop while drawing about one watt of power, down from five watts or so today."

    Please ask him to take care the current activities and deliver to demostrate first instead of dreaming for the future.

    Mr. Rory Read,

    Your people is getting back to bragging again like before, not a good sign!

    Hope you are changing AMD, not AMD is changing you!

  • Report this Comment On June 25, 2014, at 5:43 PM, keeperoftheq wrote:

    FY 2013 AMD made $5.3 billion. FY 2014 estimates are just $5.59B. That is only $290 million more than FY 2013.

    Q1 2014 revenue was already $390 million more than Q1 2013. In order for AMD to make $290 million more in FY 2014 than FY 2013 Q@, 3 & 4 would have to be flat.

    Bu wait, Q2 revenue 2014 is forecasted to make $1.43B VS Q2 2013 $1.16B in revenue. An increase of $270 million over Q2 2013.

    It gets even better.

    Q3 forecast is for $1.56B VS Q3 2013 $1.36 B. An increase of $100 million.

    Add Q1,2 & 3 and we have increase so far of $660 million more than the same period 2013.

    THE BIG QUESTION IS, HOW CAN AMD MAKE ONLY $290 MILLION MORE IN FY 2014 WHEN AT THE END OF Q3 AMD WILL ALREADY BE AHEAD $660 MILLION??????

    We know that Q4 is always higher than the other 3 quarters so we know that AMD will make more than $5.59 B in revenue for FY 2014.

    AMD WILL EASILY BEAT THE FY ESTIMATES BY $1b.

  • Report this Comment On June 26, 2014, at 2:29 AM, rav55 wrote:

    @wownwow

    "Your people is getting back to bragging again like before, not a good sign!"

    Hmmm...you seem desperately worried!!! LOL

    Intel in fact is so worried they are pushing AMD for Mantle source code to "experimant with".

  • Report this Comment On June 26, 2014, at 4:03 AM, rav55 wrote:

    Putins latest directive has been to purge Intel and AMD from Russian Government computers.

    This will hurt Intel more than AMD.

    "Russia wants to replace US computer chips with local processors"

    http://en.itar-tass.com/economy/736804

  • Report this Comment On June 26, 2014, at 4:05 AM, rav55 wrote:

    To add...

    "The Baikal chips will be installed on computers of government bodies and in state-run firms, which purchase some 700,000 personal computers annually worth $500 million and 300,000 servers worth $800 million. The total volume of the market amounts to about 5 million devices worth $3.5 billion."

  • Report this Comment On June 26, 2014, at 9:33 PM, wownwow wrote:

    @rav55,

    "you seem desperately worried"

    Not really : )

    Being a deliver&solution type of person, simply don't like lip service or complaining (recent AMD complaining about nVidia).

    There was an old saying in semiconductor: "Biig mouths sink chips."

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