AMD Warning Brings Out Buyers

Whenever a company issues an earnings warning and its stock jumps on heavy volume, it is usually a signal that an abundance of bad news has already been priced into the shares and a bottoming phase might be underway. I can’t help but think that Monday’s trading action in Advanced Micro Devices (AMD) falls into this category. I’ve been bearish on AMD stock for a while, but its freefall may be coming to an end. The shares rose 4 percent Monday after the company slashed guidance and announced a restructuring plan.

I have had a ballpark price target on AMD of $12 for a little while and the stock got very close to that level recently, trading at a new low of $12.60 in recent weeks. The pop this week has taken it back over $13 but I think any move back down to $12 would be an intriguing entry point for investors who are fans of the company. In my most recent post about AMD, I suggested that paying one times revenue would represent good value. Of course, with each passing earnings warning their revenue projections drop, but I stand by that assumption.

Given that AMD’s price war with Intel is quite fierce, this is not a situation where I would jump in with both feet because bottoms are very hard to call. However, if the recent buying pressure subsides, the stock goes back to the $12 area, and their annual revenue level can stabilize about where the stock’s market cap is, I think a bottom in AMD could be made.

This isn’t a long term investment by any means given the company’s operational disadvantages versus its main competitor, Intel (INTC). However, given the dramatic sell-off we’ve seen and the reaction to Monday’s announcement, I can no longer strongly endorse the long Intel, short AMD paired trade that I proposed a year ago back when AMD was trading over $30 per share. Intel still looks like the better bet from the long side, but gains from shorting AMD may have run their course.

Full Disclosure: At the time of writing, the author was long Intel’s $10 January 2009 LEAPS and had no position in AMD