AMDINVESTOR.COM

AMD is trading at 2 year lows, is this a buying opportunity? Everyone has there own viewpoint on this. Personally, I think AMD is intrinsically worth $12-13 or so, but it is currently trading at $8 (actually, it could go as low as $5-6).

Here’s my complete analysis.

Fundamentals Analysis

The price to earnings ratio of AMD is negative, because it lost money for the last 3 quarters. Pessimists believe this will go on forever, however, I and most analysts, believe that they will be making money by Q2 08, or at worse Q3 08. So this situation will reverse.

The stock has had a deep slide from $40 to $8 (at the time this was written). But the price slide is slowing, as we approach lower levels, the price of AMD stock is approaching it’s book value. The book value is current assets (ex. buildings, equipment, etc) - current liabilities (ex. debts, etc). The price to book value is therefore the ratio of the price, to the value that a private owner (like some bankruptcy firm) would pay for it. When the price to book value is one, that means the current price is equal to the price someone would pay for all the “parts” of AMD. According to Benjamin Graham, Warren Buffet’s mentor, a price to book value of 0.7 or less is considered a clear bargain (or possibly garbage, if there’s no growth prospects). Right now, the price to book value of AMD is about 1, so although it is in “probably bargain” territory, it’s not yet in “clear” bargain territory.

However, I would like to question how likely it is to get an “obvious” bargain stock in the red hot semiconductor sector these days.

Factors like these, along with some “AMD fanboyism”, have probably buoyed AMD from falling into the “fire sale” category, where the P/B ratio is less than 1. So as an investor, you have to decide whether or not to wait it out further, or jump on in before you miss the boat. Myself, I’ve moved in 1/3 of my cash for AMD, and i’m waiting to see if it goes up further or downwards to move the rest in.

I would like to also point out, that much of AMD being weighed down has been the result of being ripped off by ATI’s CEO and owner, KY HO. The debt ATI carried has been absorbed into AMD, but if you look at the actual revenues, it’s still pretty strong. My point is, they lost money because of a bad deal, not because of how they operate. Give them a break! The market has overreacted. Once they clear their books, they will be in the black again.

Technical Analysis

Technical analysis is about looking at charts. I’m not a fan of it, but at least it gives you a ball park range. AMD’s negative PE has resulted in historically, 2 year lows, for AMD stock. The question is do you think they will stay there forever? If you look at the chart over it’s whole history, it’s only been at these lows twice. Before the Athlon’s introduction in 2003, and 1993 when it was in litigation with Intel. In the first case, things were pretty bad in 2003 when AMD was at the $6 level, and Athlon came to the rescue, supercharging AMD from bargain CPU status to performance computing. The second case, was october 1993 when AMD hit the $2-3 level, when AMD was in litigation with Intel because Intel refused to provide it 386 specs that it needed. That would have wrecked the whole AMD business!

So do you think AMD can go up still? AMD is currently at a market capitalization equal to when it first IPO’d in the early 80s. Do you think it will stay at these levels forever? I can’t predict the future, but I just got a feeling..

Long term Upsides

Long Term Upside #1: AMD’s technological road map is superior to Intel.

First of all, they got a *true* quad core. This means that they are really4 computational cores talking with one another and sharing resources. Unlike Intel’s approach, which is two dual cores strapped together

Secondly, AMD is the real platform company. Intel says they are platform, like centrino, but what they mean by that is that they try to collaborate with a bunch of other companies to package a bunch of chips that happen to include intel, and sell them to computers. AMD on the other hand, is more engineering focused. They want to find innovative *engineered* ways to combine other technologies together. In the in term, this means we’ll see graphics chips and CPUs talking in new ways. For example, a CPU might tell the GPU to shut off, because the user is using a desktop and not playing games, so there is no need to waste precious notebook power. Long term however, AMD is interested in bringing the CPU and GPU together onto a single processor die. What this means is that, it doesn’t matter it eliminates the need for two separate processors, sharing and thereby, saving power and resources and it just becomes a “general purpose” processor. This is AMDs Fusion initiative.

Long Term Upside #2: AMD is being backed by the Mubadala group

The State of Dubai, called the richest city in the world by Fortune Magazine, has

ambitions of expansion. Dubai has created a strategic investment arm called the Mubadala Group. Mubadala’s purpose is to convert Dubai’s vast oil reserves into a portfolio of investments that cross many sectors beyond energy. To give you an idea of how much money is at stake, each citizen of dubai is worth a few million dollars, a result of their $45 billion GDP.

Mubadala Group appears, for all purposes, to be mainly interested in AMD as a bargain stock and for its strategic divestment. Dubai has another reason to buy AMD, it is spending a lot of money on infrastructure, hotels, museums, amusement parks, basically everything. AMD provides a constant supply of processors for that infrastructure (non-zionist too, as Intel is largely invested in Israel, a factor that is favorable to its local conservatively muslim population).

Mubadala is ran by smart ambitious, *young*, people, interested in growth. Their chairman is Khaldoon Khalifa Al Mubarak, a 31 year old who is spearheading their efforts to diversify away from their oil based economy. They based their decision on buying $622 million of AMD shares, at $12.5, by hiring Lehman brothers and Morgan Stanley as consultants. My guess is that AMD has to at least go up to $12.5 for them to break even? You as an investor, can buy at $8 and benefit from that advice, when it goes back to $12.5. Although it is important to consider, maybe they took a stock hit, so they could get a deal on CPUs? Hmmm……. But wouldn’t that mean more earnings anyway, by funding one of the most capital intensive places on earth? Hmmm….

However, one must also be able to dismiss the Mubadala deal as the result of clever salesmanship by Mr. Ruiz. At the same time, one can’t help but wonder if those in dubai are so easily duped.

Long Term Upside #3: Insider trading looks positive

The CEO has been buying up about 1 million dollars worth stock at 9, that looks promising. Although we don’t know if he’ll keep it up.

Long Term Upside #3: Lots of Customers

AMD has customers. They have revenue. It’s just that they got lots of debt recently. Once the debt problems are cleared up, I think they can get back to producing results for customers.

Near Term Upsides

Near Term Upside #1: New Product Introduction

This is a long term play (2 years or so) of buying AMD, so I don’t expect many near term upsides (next 4 months or so). I think as AMD comes out with products, it looks less dead, and the stock will naturally move up, but it won’t sky rocket up like before. However, this doesn’t mean you should avoid taking a position in it. I think it will skyrcocket once it gets some movement upwards.

Near Term Upside #2: Short Sellers Covering, Short Squeeze

There are a lot of short sellers who made money “shorting” AMD. Roughly 14% of all AMD shares are short shares, shares borrowed, sold immediately, and which have to be bought back later (at presumably lower prices). Those contracts will be due, and those short sellers will have to buy back AMD stock at some point, sending it upwards. This short squeeze could happen at any time, so buying in at least some stock, guarantees u “get in” at all.

Long Term Downsides

Long Term Downside #1: Intel Continues Performance dominance

Intel can crank out the higher clock speeds, and performance chips, to just over power AMD with raw voltage and clock speed. However, AMD isn’t moving in that direction. It is betting the consumer cares less about performance, versus “efficiency”, in the sense of performance per watt. AMDs platform approach requires a new way in looking at “performance”. Question is, will consumers catch on? I think they will, like a long lasting notebook, but up for you to decide

Long Term Downside #2: No Dividend

As always, AMD stock does not pay a dividend. As such, it goes against the idea of being a value investment. However, at the current bargain levels, perhaps that can be forgiven.

Long Term Downside #3: Employee Satisfaction

This concerns me long term, because I know of people who work with ATI in Toronto and in general, they aren’t happy campers. If you don’t believe me, just go onto facebook, join some former AMD/ATI employee groups and read what is being said.  I hope the new merged company will improve the way employees feel, because it affects earnings and products in the longer run.

Long Term Downside #3:  Poor Leadership

I use the word “leadership” as oppose to management, because I feel that for the most part management from an operations perspective is fine at AMD.  The biggest problem AMD faces is a lack of real leadership by CEO Hector Ruiz.  I respect Ruiz for expanding AMDs market share, and overall he’s a very talented salesman and manager.  However, the best management, is no management, when employees are so inspired you don’t have to crack the whip on them.  Consider Google’s “do no evil” company culture as an example.   In contrast, AMD’s CEO took a handsome compensation package while its stock was pummelled, fairly or wrongly, by the market.  How do you think AMDs employees felt when this happened?  Here they are, loyal to AMD in its roughest of times, taking substantial losses for “the greater good”, while their “captain” enjoys million dollar compensation.  In most companies, CEOs reduce their compesation in tough times to demonstrate solidarity with their crew.  Ruiz’s actions shows one obvious thing, he is out of touch and not communicating with his own employees.  And, if he sees some of his crew turn mutinous or jump ship (to another one, i.e. Intel/Nvidia), he shouldn’t be surprised.  Would Paul Otellini do the same thing?

Near Term Downsides

Near Term Downside #1: Erratum in Chips

The Erratum (defect in semiconductor lingo) in the translation lookaside buffer has meant delays of the Phenom processor. This is an entirely normal occurence in the processor Biz, however it has meant delayed shipments and delayed $$$ Currently, Phenom processors have mixed reviews, some say they perform great on benchmarks against Intel, others the opposite. In most cases, it looks like Phenom isn’t doing that great. Part of that comes from not being clocked higher at a speed closer to Intel, part of it is because it has been optimized on new things, like power as opposed to performance. Long term though, I feel Phenom looks great… but only time will tell.

Near Term Downside #2: Debt and losses

So there’s some significant $5.1 billion dollars of debt from the ATI acquisition, and there’s still some losses from the delayed chip in Q1. I don’t think this will last into second half of Q8.

Near Term Downside #3: Executives leaving

The departure of some key AMD/ATI executives would suggest that even the upper brass is “abandoning ship”.

Conclusion

It’s up to you how you want to price AMD. My own feeling is that the near term downsides are *opportunities* to consider. In the longer term, AMD is a fine company, and they produce great products. The near term losses are the result of being poor negotiators, not poor chip manufacturers. The long term future of the semiconductor industry still looks good, especially as AMD explores low cost computing, like the One Laptop Per Child project, in developing nations. Also, let’s not forget the ubiquity of AMD processors. They are everywhere, from cellphones, to plasmas, to Nintendo Wiis (got your attention there? :-)), to Xbox 360s, to oh yeah, notebooks, servers, etc. There’s a lot that needs to happen before AMD becomes bankrupt, in the worst case, I think it can get bought by a company like Samsung.