Will AMD Get Bought Out?

Monday, November 19th, 2012
By Sasha Cekerevac, BA for Profit Confidential

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A recent report by Reuters indicated that Advanced Micro Devices, Inc. (NYSE/AMD) has hired JPMorgan Chase & Co. (NYSE/JPM) to explore options, which is code that it’s getting ready to put itself up for sale. When it comes to technology stocks, Advanced Micro Devices (AMD) has been around for a long time, but its earnings outlook looks increasingly unfavorable. (Source: “Exclusive: AMD hires bank to explore options,” Reuters, November 13, 2012.)

Technology stocks change at a rapid pace. Even before the current shift away from the traditional personal computer (PC) to tablets and smartphones, AMD was losing the battle against Intel Corporation (NASDAQ/INTC). Now both of those traditional technology stocks are losing market share to smartphone- and tablet-based chip companies like ARM Holdings plc (NASDAQ/ARMH).

All one needs to do is look at the charts for these technology stocks to realize where the earnings outlook is brightest. AMD initially rose on hopes that it will be able to sell itself. However, following this report, AMD came out and denied these rumors. Frankly, considering where the share price is in relation to other technology stocks, one would think AMD would be happy to see any move upward in the stock.

Chart courtesy of www.StockCharts.com

The problem for AMD is that it is running out of money. To move into new markets, extensive research and development must be undertaken to compete with other technology stocks in this market sector. Without the ability to create new and innovative products, the earnings outlook can only be negative. When looking at the requirements by mobile phone and tablet makers, AMD needs to spend a considerable amount of money to conduct a significant business shift.

AMD has long-term debts and lease obligations of approximately $2.0 billion. (Source: “Exclusive: AMD hires bank to explore options,” Reuters, November 13, 2012.)The firm does have a large number of patents and engineers in place for a potential buyer. However, for the firm to get up to speed with other technology stocks, a substantial amount of capital does need to be deployed. The company is trying to reduce its cash expenses by eliminating 15% of its workforce. By focusing on areas in which it believes growth is possible, the company hopes to try and reverse its negative earnings outlook.

Looking at the chart, there is so much overhead resistance that I certainly would not touch the stock. We would need to see several quarters in which the company’s earnings outlook reverses direction and its cash flow starts to become positive. With technology stocks, investment in research and development is crucial for their earnings outlook, and at this point I don’t see AMD being able to make any inroads into the marketplace.

Considering that AMD has so much invested in the PC market, I don’t see any potential suitors at this moment. Of course, anything can change, but with the massive rate AMD is burning through cash, I would avoid this stock for now.