(By Rich Bieglmeier) Advanced Micro Devices, Inc. (AMD) is light green on an otherwise bloody red day for stocks in general. The chipmaker is slightly higher, by a penny or two as we type, thanks to an upgrade from FBR Capital Markets. The research moved AMD from "Market Perform" to an "Outperform" rating with a fresh price-target of $5.50 – a very livable, potential upside of 35.8% to target.
FBR analyst Christopher Rolland says his change a heart came about because, " While we recognize the ongoing challenges in the PC market, we applaud AMD's decision to diversify away from the traditional PC market and toward semi-custom ICs, embedded processors (including game console APUs), and microserver systems. Overall, we now believe APUs sold into Microsoft's Xbox One and Sony's PS4 can generate over $900M in additive revenue annually, while SeaMicro may drive another $300M in revenue in 2015."
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Later in the report, Rolland added, "Whereas four months ago many investors were questioning AMD as an ongoing entity, today, we believe financial stability has been secured by next-gen gaming APU wins, with potential upside driven by new initiatives like SeaMicro. While AMD's recent woes remain fresh in mind, the business looks as though it has stabilized for now, and cash levels should remain sufficient for the near future."
Obviously, investors are attracted by the possibility of a 35.8% return within a 12 month timeframe. If Rolland is correct, that's sort of like having your own ATM. Let's examine Advanced Micro Devices' five-year history for price-to-book (P/B), price-to-sales (P/S), and trailing price-to-earnings (P/E) to see if the analyst's price-tag is realistic.
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While we have this AMD conversation, the street values the company at 6.98 times its book value; whereas, competitor Intel Corporation (INTC) trades with a P/B value of 2.34. To get to $5.50 based on the current book value of $0.58 per share, AMD would trade at 9.48 times book, well above the five year average of 4.78, but below the max of 17.06.
Since Wall Street expects AMD to lose $0.25 per share in 2013, we'll have to work with 2014's consensus profit estimate of $0.04 for our P/E analysis. A price-target of $5.50 requires a P/E of 137.5; whew, feeling a little light headed from the high altitude. How about you? It is dizzying as AMD's highest P/E in the last five-years has been 22.07. Five-fifty seems to be a little out-of-reach based on P/E.
Maybe, price-to-sales will tell a different tale, let's see. The average revenue estimate for the 27 analysts covering AMD is $4.75 billion for 2013 and $5.07 billion for 2014, so says Yahoo finance. In the last half-decade, the tech stock traded at an average P/S ratio of 0.66, fairly close to today's 0.61. To reach $5.50 on 2013's sales estimate, AMD need to trade at 0.83 times sales, and at 0.78 time 2014's top-line number. Both are below the five-year high P/S of 1.31 but still above average.
Overall: Investors can make a case for Advanced Micro Devices, Inc. (AMD) to hit FBR Capital Markets' $5.50 target on a price-to-sales basis. While iStock agrees that an uptick in growth deserves higher than normal valuations, it's difficult to envision a triple-digit P/E on 2013-2014 sales growth of 6.3%.
Instead, iStock will price AMD with a 6% premium to its average P/S ratio and award a value of 0.699 on 2014's revenue estimate; arriving at a price-target of $4.96 in the next 12-to-18 months, which is still a very livable, potential upside of 23.2% as we type.