Beyond Virtual Reality, Rising Cash Could Boost AMD in 2016 and Beyond

Jon C. Ogg

Advanced Micro Devices Inc. (NASDAQ: AMD) has been a disappointment for longer than most investors can remember. Still, AMD actually has some analysts and investors who see big upside ahead. That upside may not be until late in 2016 or even after. There are a lot of risks and caveats when it comes to AMD, the biggest being viability and survivability down the road if its situation does not improve.

Wells Fargo is one of the more bullish firms when it comes to AMD. That means that their Outperform rating and $3.00 to $3.50 valuation range are well above the consensus Thomson/First Call estimate of $2.31. David Wong, the firm’s analyst covering AMD, pointed out that AMD managed to grow its cash and cash equivalents in the December quarter and that AMD’s March quarterly guidance suggests that cash proceeds from its assembly and test joint venture deal may help the cash balances rise further in the first half of 2016.

Wong asserts that this cash growth potential is possible even with AMD’s sales outlook being below estimates (revenue was $958 million, down 10% sequentially and down 23% from a year earlier). AMD’s guidance is for 14% lower in sequential sales. The computing and graphics revenues were up 11% sequentially to $470 million, but down 29% annually. Microprocessor ASP rose sequentially due to notebook mix but were down annually due to lower average sales prices on notebooks. The key GPU average sales prices rose sequentially and rose annually due to higher add-in-board channels.

While AMD’s Enterprise/Embedded/Semi-Custom segment sales were down, AMD’s inventory declines are helping cash flow ($678 million versus $761 million exiting the prior quarter). On the cash balance, Wong said:

AMD’s cash and equivalents exiting the quarter stood at $785 million, up from $755 million exiting the prior quarter. AMD expects that at the end of the coming quarter cash and equivalents will be down about $100 million, excluding possible cash proceeds from its joint venture deal associated with its assembly and test facilities which the company has previously said should bring in net cash of about $320 million on close, expected in the first half of 2016.

Wells Fargo still sees substantial risks. Wong’s valuation range of $3.00 to $3.50 is based on 0.6 to 0.7 times his 2017 sales estimate and sector risks persist for falling sales and continuing losses.