- Demand outlook improving for the company. Gartner predicts 22% growth in the sale PC units in 2010, driven by consumers who consider a PC more of a necessity and businesses that are upgrading after delaying purchases during the recession and starting the adoption of Windows 7. Gartner expects this growth cycle to extend through 2011 into 2012. Furthermore, AMD is expected to pick-up market share in the notebook market because the company has revealed the number of computer models incorporating AMD's Vision technology has tripled from one year ago. (http://www.digitimes.com/news/a20100513PD210.html) These two trends should add a tail-wind to AMD's stock.
- Historical results somewhat muddy, but investment choices clear. In December 2009 the company deconsolidated Global Foundries' results and began accounting for the business using the equity method, resulting in a short-term less clear view of the trends in the business. Furthermore, a couple years of losses and one-time expenses have made the business unattractive. That said, the most recent quarter highlighted a post-accounting change of a less leveraged balance sheet and stronger returns. Looking forward, recent commentary by Global Foundries, which supplies and is partially owned by AMD, illustrates investments in new production to meet near-term and longer-term demand growth. (http://albany.bizjournals.com/albany/stories/2010/05/31/daily1.html?ana=yfcpc)
- Investors buying now are ahead of the curve. 22 out of 31 opinions are Hold or Sell, offering significant potential for upgrades and estimate raises. Revenue and EPS estimates for 2010 and 2011 vary widely, from $6.2B to $7.8B for 2011 revenue and from $0.10 to $0.85 for 2011 EPS, suggesting a low level of conviction by the market. At the intra-day price of $8.30, AMD is trading at under 10x the high EPS estimate for 2011, or 14x the mean of $0.60. The valuation using the mean EPS is not cheap, but I'm betting the improving demand outlook and wide dispersion of estimates drive the consensus 2011 estimate up over the next year.
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