Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons I’m Steering Clear of Advanced Micro Devices Inc. Stock

By Ashraf Eassa - Sep 9, 2015 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There is room for things to get worse for this struggling chip maker.

Shares of chip maker Advanced Micro Devices (AMD -4.11%) most recently traded, as of writing, at just $1.82 per share. At this price, the company's market capitalization sits at $1.42 billion -- a small fraction of what the company was worth in its heyday.

This "low price" seems to have attracted investors looking for what might be a "bargain." Indeed, a common argument that I have seen bulls give ultimately boils down to the idea that "things can't get much worse."

If that were the case then I would probably consider buying some shares and holding them for the next couple of years to try to capitalize on a reversal in the company's fortunes. However, I believe that there is room for things to get worse, perhaps substantially so, before things could possibly get better.

Here are three reasons why I'm steering clear of AMD shares for now.

The competitive situation in PC processors may continue to deteriorate
One of the problems that AMD has faced is that its PC processor business has eroded significantly over the last several years. Part of this decline has been due to the fact that the overall PC market has been declining, but market segment share loss to much larger rival Intel (INTC -0.79%) seems to have been an even bigger driver.

I think that AMD will continue to lose share as systems based on Intel's Skylake processors come to market. I don't think the products that AMD will have during most of 2016 will do much, if anything, to improve its competitive positioning vis-a-vis Intel.

This means that AMD might be in for nearly another full year of share loss before new products hit the market that could potentially turn things around.

AMD continues to get clobbered in graphics
The market for PC microprocessors isn't the only one in which AMD's competitive situation is less than ideal. According to recent market share data from Mercury Research, AMD's market segment share in desktop-bound, stand-alone graphics processors declined to just 18% during the second quarter of 2015 -- down from 38% in the year-ago period as rival NVIDIA (NVDA -4.40%) gained significant share. 

Although the company recently launched a new graphics processor known as "Fiji" in a bid to regain share at the high end of the desktop graphics processor market, the cards based on this chip appear to face very stiff competition from NVIDIA's competing offerings. 

Additionally, AMD appears to be facing supply limitations with its Fiji-based cards, which could further impede the company's quest to regain high-end desktop graphics card share.

AMD bulls will probably argue that the company's next-generation GPU architecture could end up being more competitive than its current offerings, but with both AMD's and NVIDIA's respective track records, this isn't a thesis I'd feel comfortable putting my hard-earned investment dollars behind.

A shaky financial situation
In addition to competitive issues, AMD's cash flow statements and its balance sheet hardly inspire confidence. The company routinely burns cash, with cash burn year to date coming in at a whopping $187 million.

As if that weren't enough, AMD ended the last quarter with $829 million in cash and cash equivalents and projects that, by the time this quarter is out, its cash and cash equivalents will be down to just $700 million.

Considering that AMD CFO Devinder Kumar has said in the past that its target minimum cash balance is $600 million, the company seems to be getting awfully close to that.

If AMD can't dramatically improve its cash flow situation, then it may need to raise additional cash either by issuing additional debt (this may be difficult given AMD's poor credit ratings) or by diluting its long-suffering shareholders -- potentially significantly -- by issuing more shares in a secondary offering.

I'm keeping away for now
At this point, I think there is further downside risk to AMD shares, particularly as I think the company's business could get worse over the next year.

If AMD makes it through the next year, and if the new products that the company launches across its various market segments look competitive enough to profitably regain share, then I would consider buying and holding AMD stock.

For now, though, I'm keeping away from AMD stock.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
AMD
$91.16 (-4.11%) $-3.91
Intel Corporation Stock Quote
Intel Corporation
INTC
$41.67 (-0.79%) $0.33
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$161.54 (-4.40%) $-7.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.