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And both went on to do well. AMD, recommended at $2.67, zoomed as high as $4.65, for a 74% peak gain (at $4.07 a share yesterday, we're still up 57%). ARM, recommended at $38.57, jumped as high as $55.26, for a peak gain of 43%.
We wanted to circle back on this January 2013 recommendation for a couple of reasons.
First, as you folks know, we continue to like the way the semiconductor sector is looking – even in the face of a broad sell-off that's taken down biotech and other key digital-tech sectors.
And, second, we think it's time to take another look at AMD.
As you'll see in just a minute, some intriguing action in the options market appears to affirm our bullishness.
So let's get started.
In the Chips
In our March 24 Private Briefing report "We Want to Put You In the Chips," we showed you that the aggressive forecasts we made for the semiconductor sector were playing out just as we predicted.
As we explained in that late-March briefing, a recent Semiconductor Industry Association (SIA) report found that microchip sales have come out of the chute very strong this year. The influential trade group said worldwide chip sales rose to $26.28 billion in January – an 8.8% gain that represented the biggest increase in nearly three years.
The SIA said worldwide chip sales reached $25.87 billion in February, a year-over-year increase of 11.4%, when sales were $23.23 billion. Sales in the Americas increased by 18%.
"The trend lines remain positive for the global semiconductor industry, which has followed record revenues in 2013 with an encouraging start to 2014," said SIA CEO Brian Toohey. "The Americas market continues to demonstrate impressive growth, while sales in Asia Pacific and Europe also increased substantially year-to-year, and the Japanese market continued its recent rebound."
We promised to circle back with some microchip stock plays – which we have.
But we also assured you folks that we weren't done.
And earlier this week, Radical Technology Profits Editor Michael Robinson said it was time to put AMD on that "chip-stocks-to-buy" list. The reason: The Sunnyvale, Calif.-based AMD is benefitting in a big way from the "gaming war" that pits the Xbox One from Microsoft Corp. (NasdaqGS: MSFT) against the PlayStation 4 from Sony Corp. (NYSE ADR: SNE).
Last week, Microsoft said it sold 2 million Xbox One consoles in the first quarter. That brings total worldwide sales to about 5 million units in three short months.
However, Sony now appears to have the sales lead. Over roughly the same period, it sold nearly 7 million of its PlayStation 4s.
"Bill, this is one of the biggest battles in high tech today," Michael told me. "Gamers and industry analysts alike are parsing all sorts of stats – like total sales to stores vs. actual players – to say one platform or the other is truly ahead. But AMD offers us a way to cash in no matter which entrant ultimately becomes the top seller. In fact, I believe this stock could double from here – even though it's already up more than 50% from where we first told your readers about it."
Make no mistake: Gaming is big, big business.
Roughly two-thirds of all U.S. households play video games, according to data from the Entertainment Software Association trade group.
And tech researcher Gartner estimated the global video game market jumped from $79 billion in 2012 to $93 billion in 2013 – a surge of 18%. Gartner is forecasting sales will reach $111 billion by the end of 2015, which works out to a four-year gain of 40%.
In January, research firm DFC Intelligence said the gaming sector was doing even better than it expected, thanks to an increasing "crossover" between gaming systems and PCs.
DFC analyst Jeremy Miller has said that "core gamers seem to be willing to spend more money than ever." And while Asia remains a big contributor to the market, DFC found that core PC gameplay in Western markets did increase, in fact, last year – and will fuel big gains in 2014.
Said Miller: "We actually think the launch of the new console systems will help lift the PC game business because there is large overlap between console and PC gamers."
Clearly, the success of Xbox and PlayStation is important for both the industry and for tech investors. And it's good for us because AMD supplies the circuitry powering the intense graphics for both consoles.
AMD has long been known for its fast and powerful graphics chips. And that's why its chips power all the advanced gaming platforms being shipped today.
"This expertise helped AMD beat Wall Street's expectations when it reported first-quarter results back on April 17," Michael told me. "The Street had forecast a breakeven quarter. But AMD said it earned 2 cents a share (non-GAAP) on sales of $1.4 billion. AMD's Graphics and Visual Solutions segment was the big winner here with sales of $734 million, a 118% increase from the year-ago period. Many of these chips are semi-custom,' meaning they're designed with a specific console in mind. Clients pay extra for that level of service – which we like to see. The division had operating margins of more than 12%."
Trading at about $4.15 a share, AMD has a $3 billion market cap. It has a forward Price/Earnings (P/E) ratio of 18, roughly in line with the overall tech sector.
Over the past three months, the stock has gained 23%. But I still see plenty of upside. The stock has a Price/Earnings to Growth Rate (PEG) Ratio of 0.61, well below the "fair value" figure of 1.0.
Plus, if it just got back to its five-year closing high of $9.91 – reached back in December 2009 – you'd have better than a double from here, Michael says.
A Simple Plan
Current AMD CEO Rory Read joined the company in August 2011 from fast-growing PC maker Lenovo Group Ltd. (OTC ADR: LNVGY), where he had served as chief operating officer (COO).
While at Lenovo, Read led a major turnaround highlighted by increases in sales and market share. With Read as COO, Lenovo logged seven straight quarters as the world's fastest -growing PC supplier.
Before that, Read spent 23 years as an executive at International Business Machines Corp. (NYSE: IBM). As managing partner for IBM's Business Consulting Services Industrial Sector, he generated double-digit revenue growth and operating profitability.
Shortly after his arrival at AMD, Read brought in three new senior leaders to round out his team. They came from Dell Inc., Freescale Semiconductor Ltd. (NYSE: FSL), and the noted consulting firm McKinsey & Co.
"Back in October 2012, AMD announced a major restructuring plan designed to drive down costs and restore profitability," Michael explained. "As part of this new game plan, the company slashed 14% of its work force and consolidated operations. But it wasn't just a cost-cutting play. Read said he would generate new growth by moving AMD beyond its traditional markets of laptops and desktop computers. Read has really kept his word, in part by delivering the high-speed processors used in the data centers that make Cloud Computing a reality."
"The Cloud" is a technological innovation that delivers applications and data to clients from remote data centers. Forrester Research predicts Cloud Computing will soar from a $41 billion business in 2011 to a market of $241 billion in 2020. That's an increase of roughly 487% in just a decade.
"From where I'm sitting, Bill, Read's plan – at least so far – is working out great," Michael said. "Consider that, in 2012, AMD got only about 9% of its sales from nontraditional devices. By the end of last year, roughly 30% of AMD's sales came from 'growth markets.' These markets include professional-grade graphics, semi-custom chips, and embedded systems for things like casino gaming machines. And of course, high-speed, low-power chips designed for data centers that handle massive amounts of Web-based traffic."
And to make those server chips even more powerful, AMD recently turned to another industry heavyweight: ARM Holdings, one of the world's foremost chip designers.
Read first disclosed AMD's relationship with ARM back in late 2012. That tag-team partnership is now generating results, with a server chip code-named "Seattle" slated for delivery in the second half of this year.
It's all part of an extremely ambitious Cloud-focused plan to capture as much as 25% of the market for server-focused semiconductors in the next few years. That's roughly a five-fold increase in market share from what AMD had at the end of 2012, the last date for full industry stats, according to investment research firm Trefis.
And the ARM alliance follows another bold move Read made to beef up AMD's Cloud-based offerings. In early 2012, AMD bought SeaMicro Inc., a maker of high-speed microservers designed to save on power and space.
AMD's SeaMicro division now counts Verizon Communications (NYSE: VZ) as a key client. The telecom giant is using SeaMicro servers in seven of its data centers.
But here's where the whole AMD growth gambit gets really interesting.
A Bulls-Eye on Growth
As Read and AMD see it, the markets for Cloud Computing and advanced gaming are not separate areas.
In fact, these markets – and others, besides – are just pieces of an overall technology "ecosystem."
"What Read shrewdly sees here is that – because gaming consoles are 'smart devices' that connect to the Web – these can be used for other things besides playing games," Michael observed. "I mean, just think about it … they can be used for online shopping, for streaming movies, for data storage and retrieval, and for a whole host of other uses – some of which haven't even been conceived yet. And these days gaming is itself becoming a Cloud experience because many hard-core gamers like to play against others on the Web."
But AMD's leaders knew the consoles still needed advanced graphics cards to capture the action in the high-definition format. That's where AMD's Radeon Sky Series graphics cards come into play: They are designed to stream six games simultaneously – each in high-def.
With AMD, therefore, we have to stop worrying about which gaming system will "win" – and focus instead on the fact that we have a chance to invest in the sector's clear leader. And that will allow us to take advantage of the global boom for "next-gen" video games and consoles.
Cutting to the Catalysts
AMD has been executing, and obviously will have to keep doing so if the stock price is to move higher — as Michael believes it will.
And a number of catalysts could help make this happen. For instance, one analysis I perused reminded me that AMD:
- Just launched a line of low-powered chips designed for mobile products.
- And is competing well against Intel Corp. (Nasdaq: INTC) in the high end, since AMD chips are competing with Intel's top-of-the-line Bay Trail in CPU performance (a computing device's "brains") and besting it in GPU performance (the graphics).
The proof will come later this year when we see if AMD grabs some "design wins" for new products. But we're optimistic.
And some heavyweight investors clearly agree with our assessment.
A Great "Option"
After shooting past $4 in the wake of its solid earnings report, investment bankers Bernstein and Freidman Billings Ramsey have lifted their price targets on AMD (FBR is forecasting $6 a share). And that's prompting bullish options bets on AMD's stock.
Heading into the quarterly event, short-term call open interest (relative to put open interest) was at a near-annual-high level, according to an analysis by Schaeffer's Investment Research. AMD is consolidating at current price levels, which has served as both support and resistance throughout the past two months.
According to Schaeffer's, in Tuesday's trading session, the July 4 call option was very popular. The researchers said that a number of "optimistic option players bet on AMD to extend its lead past this mark over the next three months, as more than one-third of the day's call volume centered on the July 4 strike. Specifically, 2,707 contracts were traded here – 77% at the 'Ask' price, pointing to buyer-driven volume. What's more, implied volatility rose 1.2 percentage points and open interest rose the most of any strike overnight, making it safe to assume that a fresh batch of bullish bets was initiated. With AMD lingering near $4.02, these calls are sitting right at the money. Based on the volume-weighted average price (VWAP) of $0.36, though, breakeven at the close on Friday, July 18 – when the options expire – is $4.36 (strike plus VWAP)."
AMD's next earnings report is tentatively scheduled for the week of July 14. According to Schaeffer's analyst Karee Venema, "given that July-dated options will likely expire after those earnings are released, Tuesday's call buyers could be hoping for another single-session post-earnings pop of 11.7%, like the one the shares notched earlier this month. Regardless, should the stock fail to maintain its perch atop the $4 mark over the next several months and the options expire out of the money, risk to those traders still holding onto their positions is limited to the initial premium paid."
This is one we'll keep following.
See you folks tomorrow.
[Editor's Note: Unless otherwise directed, we recommend investors employ a 25% "trailing stop" on all holdings.]