What: Shares of Advanced Micro Devices (NASDAQ:AMD), better known as AMD, fell by $0.02, or less than 1%, in Tuesday's trading session, closing at $2.29. This was despite receiving a very bullish rating initiation from one Wall Street firm, which believes AMD's shares could more than double.
So what: Gus Richard, the covering analyst at Northland Capital, initiated coverage on AMD yesterday with an "outperform" rating (the equivalent of a "buy") and a price target of $5 per share. If AMD were to hit Richard's target, it would deliver a 118% return to shareholders.
Richard's bullish thesis amid a sea of skepticism surrounding AMD involves the expected growth of data centers and the reliance on x86-compatible chips. The only two companies that supply chips in this realm are chip-making powerhouse Intel (NASDAQ:INTC) and AMD. Because Richards believes that rewriting the software that's the backbone of today's data centers would take a lot of time and effort, he contends that x86 will "continue to dominate the server market."
Richard also believes that even if x86 loses its grasp in data centers in the U.S., AMD could be an attractive takeover target. Richard cites a number of possible suitors in his note to investors, including Xilinx (NASDAQ:XLNX), Intel, and potentially a China-based company since China is heavily dependent on x86 processors.
Richard estimates that AMD could have about 10% market share in data center processors by 2017 (or about $1 billion in sales), which should lead to gross margin expansion and EPS of $0.50 for the full year.
Now what: The real question that investors need to ask here is whether you trust Northland Capital's assessment or believe AMD is a dead duck.
On a fundamental basis it's tough to argue against the dead duck theory. AMD is in the midst of a multi-year businesses turnaround that continues to be pushed out by a weakening PC market and the heavy spending required to enter highly competitive next-generation product markets, such as the cloud, gaming, and data centers. Wall Street projects that AMD will lose money on an annual basis until 2017. However, unlike Richard's $0.50 EPS estimate for the full-year, Wall Street's consensus is a mere $0.03 profit.
However, playing second fiddle to Intel can have its perks, too. Even maintaining 10%-15% market share in data centers could net AMD substantial growth in the coming decade. Additionally, AMD has a growing presence in gaming consoles and has made significant headway in gaining microserver market share.
Personally, I've been weighing an investment in AMD for some time now, and I'm liking its potential for a turnaround. I would suggest that only those with a high tolerance for risk even consider investing in AMD, since it does have a number of competitive challenges yet to overcome. However, with new management in place and AMD targeting higher growth prospects, I suspect it's only a matter of time before the company puts its struggles firmly in the rearview mirror.