Saintvilus: Short AMD to $3

TheStreet.com

NEW YORK (TheStreet) -- Since reaching a low of $3.58 on July 24, shares of beleaguered chip giant Advanced Micro Devices have soared almost 10% in a manner of days.

It didn't take long for AMD bulls to remind me about my recent bearishness and what they perceived as an unfair attack on the company. But as shares of AMD spiked up as fast as the eye can blink, just as quickly the shares have fallen -- causing that same eye to swell up.

Should it have been a surprise?

As much as I like a good turnaround story, I've never been able to find any compelling evidence to believe AMD deserves consideration. The company's string of recent performances, which include consecutive quarters of 30%-plus revenue declines, has been average at best. These sorts of details, however, were never enough to keep AMD longs from exaggerating the company's rate of recovery, while insisting that "new money" should hop aboard the AMD bandwagon.

On more than one occasion, this level of investor support has worked as new investors have jumped in - pouring their faith into the stock. Investors continue to buy the story that "What was once old can be new again" - helping the stock to double in value over the past eight months from its November 2012 lows of $1.81 to as high as $4.65 in July. But the business fundamentals have never justified the optimism. PC's are dying and "they ain't coming back." It's a new era.

The fact the stock has been down by as much as 23% over the past couple of weeks means that the Street is beginning to wake up to what we've always known: This is still one of the best short plays on the market.

Despite posting 6.7% revenue growth in its recent earnings report, which beat estimates by more than 5%, AMD still has too far to go to catch rivals Qualcomm and Broadcom in mobile devices.

What's more, AMD's server business, which once was looked upon to offset the weakness in chips, has begun to fall apart, losing meaningful market share to Intel . AMD management, which doesn't have a strong history of execution, decided it was best to hinge the company's future on the gaming industry.

Essentially, despite the company's lack of leverage in chips, the fact that management wants to "play games" with Microsoft's Xbox and Sony's PlayStation, was a mistake.

As I correctly predicted, profit margins weren't going to be enough to support the recent rise in the stock price, especially with the server business on the decline as the company lacks competitive significance in mobile. Late as it was, this was what the Street finally realized after management guided margins for the new gaming consoles 50% below Street estimates, which sent the stock tumbling down.

I believe that investors interested in AMD should question management's aggressive growth strategy, which will come inevitably at the expense of better profit margins. While the third-quarter guidance was solid, which assumes 22% growth, absent better operating results, it's not going to matter. I can't see the recovery potential in a company that has now posted five consecutive quarters of negative cash flow.

While management does continue to speak positively about the company's second-half prospects, it's still beyond comprehension that the company insists on focusing portions of its business on a morbid PC industry. I have absolutely no faith that this is going to work out very well. Besides, even during the PC boom, AMD was fighting Intel and Nvidia for chip slots. Now both companies have passed AMD in mobile, the most important market at the moment.

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AMD investors will get angry, and I'm prepared for the "You can't see the forest for the trees" arguments. But I need something more compelling than that to get me to believe in this story.

Better yet, I need an explanation of where exactly AMD does fit into this market. AMD is a square peg and the market is a round hole. The business is not working in PCs, while it's losing share in servers. AMD can't play games well and it has no presence in mobile.

If that is not a recipe for a short I don't know what is. With shares closing on Tuesday at $3.72, I'm predicting it reaches $3 by the end of the year.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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