Fast Company

Should You Invest in AMD?

Intel [INTC] may be the semiconductor industry titan, but new chips released today by AMD [AMD] suggest the company can compete with Intel technologically. AMD's stock is hovering around $2 a share. Are shares of AMD undervalued? Should you buy?

As with any tech company, the proof of AMD's potential is in its products. Released today, AMD's new Phenom II chips range from 2.5 to 2.8GHz, and have three or four processing cores (denoted by the "X3" or "X4" in each chip's title.) Although their clock speeds top out at less than Intel's chips--which reach upwards of 3.0GHz--AMD is making a value proposition with the Phenom II chips, which are available immediately.

Here's a side-by-side example: The Phenom II X3 720 Black Edition, with all three cores running at 2.8GHz, costs $145; by comparison, Intel's 3.0GHz Core 2 Duo costs $163, with only two cores. The price differences also work in the other direction; an upcharge of only $12 buys you a faster (2.6GHz) X4 810 quad-core chip from AMD ($175) than it does from Intel, which has a slower 2.33GHz quad-core Q8200 that costs $163. Benchmark tests show the Phenom II to be competitive with, and in some cases faster than, Intel's best chips.

Another important consideration when evaluating a tech stock is the company's roadmap. AMD's new chips support ultra-fast DDR3 RAM, which means they will work with new motherboards like Asus's lovely AM3-based M4A79T, which allows users to use up to 16GB of RAM and overclock their processors (something that AMD chips are particularly good for.) The new AMD chips are also backwards-compatible with AM2+ motherboards, so existing AMD owners can upgrade by simply dropping in a new chip.

AMD will also continue to benefit from the big business of Microsoft's [MSFT] XBox, which rumors say will continue to use AMD processors. Sony's [SNE] struggling Playstation platform currently uses NVIDIA chips, though it may switch to Intel soon.

Granted, any buy in today's stock market (short of, perhaps, gold-plated stocks like McDonald's [MCD]) is a risky play, and AMD is no exception. The company reported steeply declining sales (which dropped by 33%) and substantial losses last quarter, due to "macroeconomic conditions." But Intel didn't fare much better, reporting a 23% decline in sales itself. Yes, the computer industry as a whole is softening. But at some point, it will solidify again. Assuming the recent spin-off of its manufacturing division goes smoothly with Middle Eastern investors, AMD will be free to concentrate on chip design, potentially leaving it leaner and meaner once demand recovers.

Recent market activity has also suggested that demand for semiconductors in 2009 might be slightly greater than originally forecasted. But what do the analysts say about AMD specifically?

Standard & Poors gives the stock a three out of five star rating, and suggests investors to hold. S&P's research on AMD predicts revenues to fall further in 2009, but says that AMD is making headway in lower-end markets and represents the only viable alternative to Intel for OEMs. "We believe PC manufacturers prefer to have more than one microprocessor supplier," S&P says, "and will try to support AMD for as long as it is financially feasible." AMD isn't entirely on industry welfare, though; as S&P notes, their quad-core processors are gaining traction and new products are looking increasingly promising.

However, AMD has raised significant debt to keep itself alive, and continued revenue starvation will eventually hurt research and development. Thomson Reuters, another financial research company, isn't any more sanguine about AMD's prospects, but its research shows that AMD may be undervalued. AMD has a positive value catch-up component--meaning that recent positive performance has yet to be accounted for in the company's share price, according to Reuters. The company still rates "Underperform," but it's worth noting that Intel rates just as poorly by most metrics.

Market Edge researchers, however, call AMD a "Buy," and say it is bullish on a long-term basis citing a "weak upward trend."

In sum, no one is calling AMD a hot stock to flip. But as far as penny stocks go, AMD is one that may very well have a strong future come early 2010 and beyond. If the company can keep churning out high-quality Intel alternatives and sustain itself on revenue from the XBox, it might have a chance at keeping its debt-level in check. In 2009, survival will be the goal for many companies. For AMD, it might mean a chance at rebirth.

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