AMD is in the running for the best tech stock for 2007. Click here to see the other entries.
The task at hand is to find the tech stock most likely to outperform the market in 2007. What if I can show you a company that is poised to retake a recently lost performance crown, is fighting a price war its competitors' shareholders can't be happy about, and is available at its lowest share price since 2004?
That stock, my friends, is Advanced Micro Devices (NYSE: AMD ) . Now available at a broker near you at a 60% discount from its 52-week highs, this scrappy underdog is better equipped to fight the good fight against chip giant Intel (Nasdaq: INTC ) than most investors seem to realize. Think of it this way: Intel still outsells AMD by three processor units to one. For every dollar of lower prices in the price war, it takes three times as many real dollars out of the bigger company's top line.
Don't forget that AMD is used to making a living off slim margins, in the same class as Wal-Mart (NYSE: WMT ) or Dell (Nasdaq: DELL ) . Its substantial investments in manufacturing infrastructure leads to Texas Instruments (NYSE: TXN ) -sized depreciation and amortization -- and more than $1 billion in positive operation cash flow through the first three quarters of 2006. But management tends to spend all of that cash on expanding its business. As a result, AMD is keeping pace with Intel in processor performance, making for a give-and-take race between two worthy competitors.
Next up from AMD is the native quad-core Barcelona processor, which is likely to outperform the Intel quads that are merely two dual cores bolted together. After that, both companies are moving on to smaller and more advanced manufacturing processes -- in AMD's case, together with IBM (NYSE: IBM ) . There are worse partners than the perennial world leader in new patents. And in 2008, the ATI acquisition should start to bear fruit, with fully integrated systems-on-a-chip and better graphics performance than anything Intel can produce.
Over the past three years, Intel has grown revenues at a plodding 5.5% annually. Texas Instruments did better with 13.2%, but AMD smokes them both with 17.1% annual sales growth. Intel shareholders aren't likely to want the price war extended beyond 2007, which is management's current plan. When the pricing lid comes off later this year, AMD's earnings will take off again, as its highly efficient operations creates earnings leverage when revenues and gross margins expand. And that depressed valuation will follow suit.
So will AMD rise to new heights in 2007? I think it will. In the end, time will tell, but if you agree with my assessment, let us know in our Motley Fool CAPS investment-intelligence community. Just rate AMD "outperform," and fill out your virtual portfolio with a few more of your best -- or worst -- ideas. Make your mark today, and don't forget that you can add your own thoughts on any stock along with your rating. Based on your ratings, we will declare the best tech stock of 2007 early next week.
Fool contributor Anders Bylund is an AMD shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always on the cutting edge.