: Shares of
Advanced Micro Devices (
are in a free fall on Wednesday, down 11%. The company reported
earnings after the
closed on Tuesday and investors used the moment to sell the
stock. Results of 6 cents per share in the 4
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.
: 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,
disappointed the market just last week.
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 -
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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