An Argument for AMD

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After warning that results would be poor, Advanced Micro Devices (NYSE: AMD) delivered on its promise in spectacular fashion, receiving a nearly 17% thrashing for its trouble. Investors and analysts alike are abandoning this stock in droves, with one analyst using the term “un-investable” – more on that below. AMD shares closed the week at a mere $2.18 per share and carrying one of the gloomier palls I can recall since financial stocks imploded in 2008. As much as I openly admit to appreciating the contrarian view of investing, people hate this stock; and yet, a single argument persists. With shares so low in absolute terms, AMD shares currently can be treated as a perpetual call option, as long as you understand that it represents a highly speculative play.

Earnings

Even with the company’s guidance warning, analysts were expecting a loss of only $0.13 per share as compared to the $0.21 loss reported. The company’s quarterly revenue of $1.27 billion is a crushing year-over-year decline against $1.69 billion for the same period a year earlier. Perhaps the worst statistic is the reality that the EPS loss is a 62% year-over-year decline. The company also guided lower for the fourth quarter and announced the planned layoff of 15% of its workforce.

In research released since the earnings results, Stacy Rasagon of Bernstein Research stated: “Indeed, we now see the prospect for structurally lower margins, as well as cash burn [...] Frankly, the most common adjective that comes up when we discuss the company with clients is, simply, ‘un-investable.’ We are now believers.” Leaving aside the utter absurdity of an “un-investable” stock that receives a “Market Perform” rating, it is clear from both the move and the tone that sentiment on AMD is awful.

Industry Outlook

Another point of agreement amongst analysts and investors seems to be that any recovery that is seen in the chip space will be led by Intel (NASDAQ: INTC). Despite disappointing earnings of its own, Intel holds promise on several factors. First, Intel offers investors a 4.2% dividend yield that will provide a very healthy bit of insulation while the market conditions for chips play out. This couples with Intel’s size to make it safer.

Next, Intel should be a significant beneficiary of the release of several new Windows 8 devices, expected later this week. While critics remain skeptical on the ability of Microsoft (NASDAQ: MSFT) to stay relevant in the mobile world, an even lukewarm reception for Windows 8 and the new generation of products should give Intel a needed boost, as most of these devices will include Intel chips.

Finally, as Intel races ahead with the development of its own 4G LTE mobile chip to compete with Qualcomm, the chip maker is actively working to adapt. While the chip is not scheduled for release until 2013, it is on the way. In the interim, Intel chips are still widely used in non-U.S. mobile devices. Intel will weather this storm and should be a part of your core portfolio.

A Call Option Trade

While it is important to understand that the nature of an option trade is such that you can easily lose the entirety of your investment under many circumstances, there can be considerable upside. The added benefit of AMD shares is that this is one “call option” that will never expire – short of bankruptcy or takeover. AMD shares traded above $4 within the last three months and above $8 in 2012. While a return to these levels is not expected, neither is it impossible. This is a very speculative play that could return several multiples of your investment or result in a complete loss. It is the $2.18 price of shares (at the time of writing) that warrants any consideration. If you are looking for an interesting speculative play, AMD is it; as a core investment, Intel is the stock to buy.

Dig Deeper

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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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