Has Advanced Micro Devices' Stock Bottomed at $5? Stock Review

Put this stock review update in the category of alleviating a concern. The shares of Advanced Micro Devices (AMD), first discussed in this space on Sept. 30, 2011 at a price of $5.08, as expected, are beginning to show signs of life after treading water for two months; I obviously still like the stock at this stage, and I'm Reiterating my Buy view.

The calculation forwarded here argues that Advanced Micro Devices will benefit from a ripple effect from the iPhone 4s wave.

Much-maligned cell phone service provider Sprint (S) obtained the rights to the iPhone 4s on Oct. 7, and to say that product win has set the tech world ablaze would be an understatement. And the media world, too. The publicity stemming from the iPhone 4s's launch has been most intense since perhaps Microsoft's (MSFT) heyday and its much-anticipated launches of new operating systems.

An iPhone 4s Wave

So far the iPhone 4s is matching its billing, and that publicity whirlwind is igniting an iPhone 4s wave in the cell phone service provider sector. In other words, there is a renaissance in the sector -- one that attracts new minds (translation: new subscribers) that previously had not considered the iPhone 4s or even a smartphone. When you have grandmothers on fixed incomes getting iPhones, you know that your product is creating a stir.

And that whirlwind is good news, not only for iPhone 4s newbie Sprint, but also for microprocessor and chipset maker Advanced Micro Devices.

Advanced Micro is well-positioned to benefit from an upswing in both PC sales and notebook computers and other mobile devices. Look for 2012 revenue to rise 5 to 7 percent to about $7.1 billion, after a 1 to 2 percent rise 2011.

Advanced Micro should benefit from new product introductions, and the company's market share in PC and graphics markets should increase.

Margins also should widen, to about 47 percent in 2012: All those iPhone 4s wave customers will spark an increased demand for AMD chip-laden products, allowing the company to maintain existing prices in most categories. Margins will also benefit from outsourcing.

Furthermore, after a pedestrian 2011, Advance Micro's improved product portfolio, nimble operation model and solid cash flow will lead to a substantially higher P/E ratio -- a P/E that's above the company's historical average. In a summary, with a P/E of about 4, Advanced Micro is cheap.

The Thomson Reuters First Call FY2012 EPS estimates for AMD is 58 cents, which looks about 5 to 10 percent low, according to my analysis.

Technical Analysis: Advanced Micro's shares slid roughly in sync with the U.S. economy's slowdown last spring and summer, falling from about $9.60 to the psychologically significant $5 level in October. From that point AMD tested $4.30 twice, and held, then essentially straddled the $5 level for about two months. A recent push above $5.60 is encouraging, and the stock is now above the key, 50-day moving average.

Stock Category: Advanced Micro is ideal for investors who want a high-growth stock with plenty of upside potential. Keep in mind that Advanced is a moderate-risk stock not suitable for low-risk investors. Also, there's a 10 percent chance you'll lose your entire investment with AMD over a 10-year period.

2012 Outlook: I view Advanced Micro Devices as a long-term play, but if you're looking to sell AMD within the year, it's probably best to take your profits after it rises to $5.90-5.95, if it fails to rise above $6.

Stock Analysis: Advanced Micro Devices is a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 50 percent position in AMD now, and another 25 percent in one month, if the U.S. economy does not worsen substantially. I'd put a revised sell/stop loss at: $3.70.

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Disclosure: L.C. Jacobs of New York, N.Y. reviews stocks on a quarterly, semi-annual, and annual basis.

L.C. Jacobs has no positions in stocks reviewed, but does own federal, municipal, and corporate bonds.

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