Advanced Micro Devices' Rally Will Reverse Course Soon

Company is bound to face selling pressure with increasing competition and high debt

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Aug 16, 2016
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Advanced Micro Devices (AMD, Financial) has been a strong performer over the past few months.

The stock has shot up thanks to two successive quarters of good results. However, its rally may have peaked as the stock hardly has any upside to offer at this point. All the good news is probably baked into the current rally, and Advanced Micro Devices is likely to head lower in the near future.

What about debt?

Advanced Micro Devices’ huge debt is bad news. The company has a long-term debt of $2.14 billion in its books with maturities starting in 2019, and it is necessary for it to repay $600 million in 2019 and $450 million after that.

The company has total cash of $957 million. Apart from the debt repayment, the company also has to introduce new chips to compete against its foremost rivals.

Furthermore, the company also has to pay interest, and this is a major slog for it to become profitable. As a matter of fact, it is mandatory for Advanced Micro Devices to pay $41 million each quarter. And with a negative operating income, that is challenging to accomplish. On the other hand, the company also has to expend some of its cash reserve. All in all, the company doesn’t look like a good investment judging from fundamentals alone.

Nintendo decides to use NVIDIA’s chips

Gaming consoles accounts for the only segment where Advanced Micro Devices is ahead of NVIDIA (NVDA, Financial). Advanced Micro Devices has a robust presence in gaming consoles, and it is highly likely that the upcoming upgraded PS4 and Xbox One which will be released with 4K and virtual reality games will be powered by upgraded and enhanced versions of the company’s custom APUs.

This clearly means that NVIDIA has only one option –Â i.e., Nintendo (TSE:7974, Financial)Â –Â to come back in the console market. Stockholders should also keep in mind that NVIDIA knows how to defeat its rivals.

Unfortunately, Nintendo has been a straggler in the home console conflicts. As per Vgchartz, Sony leads the race as it has sold around 42.5 million PS4s around the globe followed by 21.8 million Microsoft’s Xbox Ones units.

At last comes Nintendo as it has sold just 13.2 million Wii units. However, if we include Nintendo’s 3DS handheld in the eight quarters, it is in fact the best-selling console with around 58.7 million units sold.

Conclusion

Given the growing competition and the debt concerns, it will be difficult for Advanced Micro Devices to continue moving higher. As a result, investors should consider selling the stock now.

Disclosure: I don't hold a position in any of the stocks mentioned in the article.

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