Advanced Micro Devices Collapse All About Valuation

advanced-micro-devicesEvent: Shares of Advanced Micro Devices (NYSE: AMD) are in a free fall on Wednesday, down 11%. The company reported earnings after the market closed on Tuesday and investors used the moment to sell the stock. Results of 6 cents per share in the 4th quarter, beating estimates by the proverbial penny per share. Revenues came in at $1.59 billion, besting expectations of $1.54 billion. The forecast for revenues in the first quarter came in at $1.34 billion, short of the $1.36 billion current expectation. That disappointment was enough for the shorts to pounce. Wells Fargo raised estimates for the company and reiterated an Outperform rating on the stock. That support of AMD did not seem to help the stock.
Analysis: You can sum up the action in Advanced Micro with one word: valuation! The decline in Advanced Micro shares after earnings should have been fairly predictable. The stock had enjoyed a huge run in 2013 that had the stock nearly doubling in value. That push higher resulted in a rich valuation that made the stock vulnerable to a correction after earnings. In addition warning bells should have been going off after industry giant, Intel (NASDAQ: INTC) disappointed the market just last week.
When stock prices are high it is simply more difficult to impress. While AMD benefitted from chip sales for video game platforms, the decline in microprocessors for personal computers continues to depress as was noted by Wells Fargo even as they were raising estimates for the company. They might be the only one to do so.
The problem for investors in AMD is the precarious position on profitability. When you are sitting on a small loss in 2013 and an expected small profit in 2014, there is no margin for error. Even though you could argue that the revenue guidance miss amounts to a small blip, it magnifies when you are in a precarious operating profit mode. At current prices, including the 11% decline on Wednesday, shares of AMD trade for 28 times 2014 estimated earnings. Would you pay a premium valuation for a company in this situation? I wouldn’t. There are far too many things that can go wrong than can go right.
Going forward one can certainly argue that AMD will bounce back after Wednesday’s sell-off, but I don’t think that will be the case. In fact, the selling might be just getting started. Given that premium multiple to earnings – earnings that may or may not materialize, AMD has plenty of room to fall. In fact, I’m surprised the stock dropped only 12%. The play now is to either sell the stock if you own it, short the stock, or buy longer dated put options looking for more losses here over the next 1-6 months.

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