Guest post by
Last week I was wading through my programming stuff when I got an instant message from my boss. He asked, “When would be a good time to sell AMD”?
Now a lot of thoughts are raised with a question like that. Like, where did you come up with AMD and what were you smoking or drinking when you hit the bid?
But what did I do? I bought shares.
First let me back up a little.
Brief Technical Discussion
Although I value stocks in a fundamental way, I also employ some technical analysis into my research. I grabbed a one year daily chart where I had the standard 20, 50 and 200 exponential moving averages plotted, volume, fast Stochastic, William R%, MACD, and a few others.
What I saw astounded me. I went back and checked the stock as far back as Google finance would let me. In recent years the last time the stock got this low and recovered was in 2008. Additionally, the last time AMD was over its 200 moving average was in 2003. It crossed back under over 6 years ago, and the stock has been under constant pressure for over 6 years.
I remember a technical condition, that was taught to me years ago. All gaps must fill. Gap downs included. Where is the first gap? $2.56 and the second is the $3 area.
Back to Fundamental Analysis
Fast forward to now.
What we have is a globalized and somewhat exhausted growth stock. It is highly distressed and AMD’s valuation is all over the board. In other words, it is a hot mess. Let’s look at the details.
Starting with the Piotroski score as a score to determine the quality of a business by looking at the accounting, the TTM score is a 3.
This puts AMD at the bottom of the pile in terms of quality.
Last year it was a 5, before that 6, and before that 7. So the quality has been going downhill.
If you take a look at the above numbers, you see that outside of the Beneish M score, which is a reflection of earnings manipulation, AMD is not in a good state.
Here are some valuation numbers I came up with using the OSV intrinsic value spreadsheets.
- Discounted cash flow: $3.60/share
- Ben Graham value: -$2.47/share
- Earnings Power Value: $6.24/share
- Total Net Reproduction Value: $9.67/share
- NCAV: -$1.13/share
Valuation as a whole is horrible, particularly due to the competition and headwinds AMD faces.
Current ratio is 1.8. Over 2 would be better, but the worst offender is long term debt. It is now over $2.01 billion, giving it a Long term debt to equity ratio of 2.1.
From these numbers alone, you gea sense that AMD difficult to value and assess. So why am I interested in investing in something that is so broken.
So Why AMD Despite the Horrible Valuation?
There are a few reasons:
1. Desktop and Laptop CPUs and GPUs are still moving regardless of what Apple is doing (regardless of what people think).
2. Global founderies has a strong relationship with AMD, and through Abu Dhabi, a company called Mubadala has a direct interest in AMD. Mubadala invested in AMD to keep it liquid in the event something went awry. It now has a 19% stake in the company and more so in joint technology development and research. I believe they have billions more if they need to do an emergency intervention.
3. AMD announced its foray into ARM development. A bold step that adds to CPU, GPU, logic circuits, memory circuits, flash technologies, and mobile chips of various kinds.
4. AMD is a globalized company. Around the world there is a lot of interest by public and private entities to make sure AMD survives and functions as a company for the future in order to make sure that the Intel domination is curtailed. We also know that since the dawn of the personal computer, Intel has always had their products priced at a premium. At the same time you could find AMD products of equal quality or better for a lower price. It was true then, it is true now.
5. Computer Architect Jim Keller joins AMD as the Chief of Processor Group. He was Apple’s A4 and A5 chip designer. Those chips are in the iPhone and iPad. Leaders at Intel probably had a collective series of strokes when they discovered this. Keller is one of the best SOC designers and with his ARM design experience, this should change the future core technologies of AMD.
6. The Austin office had a for sale sign hammered into the grass out in front of the building. A campus sale will generate cash that they need.
Many people are already likening AMD to Nokia and its recent pull out of hell. Nokia also went under $2 per share, now 6 months later it is at $3.44 a share. Not bad.
This is one instance (stock wise) where I followed my boss into an AMD investment.
What is the Narrative Here?
- Stocks are weird
- Sometimes you get investment ideas under unusual circumstances.
- Sometimes it is good to combat your cognitive dissonance when it comes to valuation.
- Sometimes stocks that do not value perfectly can surprise you.
- Technical assessments are not arcane and lend to the narrative “the past is always a good predictor of the future”.
The author is long AMD