Finishing Off The AMD (AMD) Break-Up: 24/7 Wall St. Worst Case Plan

AMD (AMD) sold its TV chip business to Broadcom (BRCM). It was not much of a bone to throw AMD shareholders. The company is still over-leveraged and faced with potential debt service problems. The $193 million Broadcom paid is a drop in the bucket.

It was hard to find an analyst who believes that the transaction will cure what ails AMD. It still must pick up market share in the server and PC businesses from larger competitor Intel (INTC) and out-source a good deal of its manufacturing to save money.

AMD’s board might as well complete the break-up of the company now.

AMD’s shares are down well over 70% in the last two years and trade at $6. Its market cap is off to $3.6 billion. The firm has debt of $5 billion.

In the last quarter, AMD had revenue of just over $1.3 billion and an operating loss of $143 million. It is in no condition to attack its debt load.

The most attractive piece of AMD is its graphics chip business. The company got these assets by buying ATI. As high-end PCs run more video and gaming programs, AMD, Intel, and Nvidia (NVDA) stand to make a great deal of  money in this sector.

The graphics chip portion of AMD has a revenue run rate of about $1 billion per year. Nvidia is trading near a 52-week low and its multiple of market cap to sales is almost 2x. That would make the AMD graphics chip business worth at least $2 billion. At the high end of Nvidia’s 52-week trading range, the value would be closer to $5 billion.

AMD has a chance to sell or spin-out its graphics chips business. The parent company would keep the PC and server chip operations which is where most of the competitive risk is. The firm would continue to battle Intel, meaning its gross margins are not likely to be good. But, it would have very little debt and would likely have fairly good years when PC sales rates are strong.

There are no catalysts to drive up AMD’s value. It will have to create one itself.

Douglas A. McIntyre