After a Miserable 2012, This Chip Maker Finally Knows the Winning Formula

Feb 11, 2013 7:41:53 AM PST | 250 View(s) | No Comment(s) - Post a Comment Rating

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AMD
$4.01 +$0.05 +1.26%

There's no way of denying Advanced Micro Devices, Inc. (NYSE:AMD) shares saw a miserable 2012. The stock fell from a peak of $8.35 to a low of $1.81 - a 78% implosion, largely on the heels of the fact that AMD was simply too slow in steering away from the waning PC business, and towards the still-growing micro server segment.

As they say, though, that was then, and this is now.

Just to be clear, Advanced Micro Devices is neither profitable on a trailing basis, nor is it expected to be profitable in the immediate (2013) future. Just to be equally clear though, a company doesn't have to be profitable right now for its stock to rally. Indeed, it seems as if some of the best stock gains investors have aver been rewarded with have been doled out in the period before profitability was actually achieved, but when it was on the horizon. That's the sweet spot AMD appears to be in right now.

Advanced Micro Devices, Inc. doesn't make the fastest or the most powerful micro processors; that honor still largely belongs to Intel. AMD does make a micro processing server chip that's amazingly energy-efficient though, and when these chops are arranged to work together, they can be as effective as the faster and more powerful Intel chips, yet still consumer less power. On a bottom-line, cost-versus-performance scale, IT departments and technology managers are starting to gravitate towards more economical chips.

Driving the growth that's driving sales of energy-efficient micro server processors is the still-booming cloud computing industry (which is being driven by the still-booming tablet and smartphone industries). Digital content providers as well as consumers are looking for places and ways to remotely store all sorts of digital "stuff", but it's only been since 2012 that the required technology and the actual need have intersected.

As proof of the pudding, micro server chip shipments quadrupled in 2012. Granted, they were at paltry levels in 2011, so any comparison would look like a huge improvement. But still, they're catching on so much that Advanced Micro Devices believes its new micro server processor chips could make up half of its business within three years.

Though that distant future is also cloudy, there's enough clarity for AMD at this point that the market is willing to start tiptoeing back into the stock; that's the wave worth trying to ride at this point.

As for the upside (near term or long term), this is still best played as a "be patient but don't be stubborn" situation, meaning the company's got the right stuff to keep the stock rallying for a while, but if you get a beneficial move, use it as an opportunity to lock at least some of the gain down.

Just for perspective though, the current price/sales ratio is a mere 0.36, versus the market average of 2.4. That implies Advanced Micro Devices, Inc. shares are about 85% undervalued, IF (and that's a big if) the company can return to reasonably-profitably levels on any sales increase stemming from its new micro server chips.

Looking for some more entry and exit timing help with this stock? SmallCap Network Elite Opportunity (SCN EO) has an open position in AMD. To find out what other open positions SCN EO currently has, and to learn why so many traders and investors are relying on this premium subscription service, click here to find out more.

Bryan Murphy is a paid contributor of the SmallCap Network. Bryan Murphy's personal holdings should be disclosed above. You can also view SmallCap Network's complete disclaimer and disclosure.