We’ve owned Advanced Micro Devices (AMD) in The Kelly Letter for a while now, with a cost basis below $10. Over the weekend I received a note from an analyst I’ll call Robert, who subscribes to the letter, from which the following:
You need to face facts on AMD, and spare your readers endless rationalizations for what was obviously a big mistake on your part. They’re sitting on a more than 20-percent loss owning the industry’s number-two, while number-one Intel (INTC) dominates. Take your lumps and get out of AMD before the loss widens.
I have admitted in the letter that we bought too early. I’ll go so far as to call it wrong on my part. It’s not the first time I’ve misjudged the timing on either buying or selling, and I know it won’t be the last. This is a business of approximation and, frankly, I wish I was better at it. Am I pretty good? Yes, but I wish I was better and my timing on AMD is one of several examples hanging on my personal wall of humility.
However, I still believe AMD will work out for us. We’ll eventually make money. We will have waited too long by the time it happens, but if waiting too long is the worst consequence of a mistake then it was a reasonable mistake.
Anybody owning AMD recognizes that it’s the industry’s perennial number-two. Don’t think that we bought it expecting AMD to overtake Intel as the leading chipmaker in the world. It won’t, and even it doesn’t expect that. It’s not even one of its business objectives.
Three weeks ago, the company announced a management change that removed Dirk Meyer from the CEO slot and replaced him with CFO Tom Seifert while the board searches for a new leader. That’s what sent the stock on its recent 15-percent nosedive. Those knowing only that would sense disaster. Those who’ve been following the stock recognize that it’s still within the range it’s been in for the past year — the bottom of the range, and I think it’s time to consider buying, not selling.
I wrote two weeks ago to subscribers that we’re sticking with AMD for these reasons, each explained in more depth in the letter:
The company’s posting good results, thank goodness. It reported a 14-cents-per-share EPS for the fourth quarter, better than the 11 cents expected. Revenue stayed the same, which tells us AMD’s getting better at controlling costs. Indeed, its operating margin has improved from -48 percent three years ago to -34 percent two years ago, 12 percent one year ago, and 27 percent now. Pretty good.
If sales perk up as they should when Brazos achieves more acceptance in the tablet market and Fusion makes a strong showing in the graphics category, I think the stock is worth $15, which is a double from Friday’s close.
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