Technology

Why AMD's Securities Offering Is Positive Despite Shares Falling

Jon C. Ogg

Published: September 7, 2016 1:26 pm

Last Updated: January 13, 2020 3:50 am

Any time that investors see a stock down 6% or more, they probably aren’t going to be too keen on hearing that the drop is actually supposed to be good news. If that big drop is from a securities offering that may dilute their right to future earnings, and after dilutive news a week or two earlier, then they may understandably double-up on their challenge that the drop was actually good news. Now there is a situation where bad news may be good news in the case of Advanced Micro Devices, Inc. (NASDAQ: AMD).

AMD shares were hit hard, down over 6%, after news from Tuesday evening that AMD is issuing just over $1 billion in new securities. The offering was listed as being $600 million in common stock and $450 million in convertible senior notes. On top of that, AMD granted the underwriters a 30-day overallotment option to purchase up to $90 million in shares and up to $67.5 million of the convertible senior notes. That makes the real potential offering $1.2 billion if the overallotment is taken.

So, how can this be good news? There is not just one answer here, but all of this points to a less burdened AMD in the near-term and in the long-term. It also has to be assumed that AMD shareholders were not looking for a dividend any time soon.

AMD’s cash balance at the end of June was roughly $957 million. AMD had another $671 million in accounts receivable and $743 million in inventory. Its current liabilities came to $1.58 billion, and its total long-term debt was $2.01 billion. AMD’s total assets of $3.316 billion, which includes plants and equipment and goodwill and intangibles, was less  than its $3.73 billion in total liabilities.

It is important to understand that all of this ties in with AMD’s recent news that it entered into a new Wafer Supply Agreement with GlobalFoundries. This created a change to the terms and created potential dilution from warrants.

Now look at what AMD plans to do with its cash from the securities offering. AMD said that it will use the proceeds from both offerings to repay up to $226 million in borrowings, as well as to purchase up to $1.02 billion worth of senior notes.

AMD also has the option, after the tender offer, to call any and all of the untendered 7.75% Senior Notes due 2020 with any remaining net proceeds. As for any unused capital from the offering, AMD said that can be used for capital expenditures, working capital and other general corporate purposes.

Moody’s Investors Service has just affirmed AMD’s ‘Caa1’ corporate family rating and has affirmed its ‘Caa2’ rating on the senior unsecured notes. Not only that, Moody’s revised the rating outlook to Positive from Negative.

This move will potentially decrease the net debt, and even if it is just extended out it is still moved out to where close to half of its longer-term debt does not come due for ten years. And with it being convertible, that debt could ultimately be converted into common shares and drop off the bad side of AMD’s balance sheet entirely.

Now consider that AMD’s stock has been on a giant run in 2016. That is understatement, and a massive one at that. AMD shares are still up over 155% so far in 2016 alone, and they are up 300% over the last year! No other major chip company can claim that at this time.

AMD was even just featured as one of several technology stocks with runaway stock charts and excessive valuations. By locking in a stock and convertible debt sale after such a big run, AMD is using its recent strength while the market is willing to hand money over to it. AMD’s analysts were also stepping all over themselves this summer to raise their target prices for AMD shares.

AMD has been migrating away from just being a competitor against Intel Corp. (NASDAQ: INTC) in processors for PCs and servers. AMD has won the graphics chip market with video game makers, winning the designs for the Xbox 360 and for the PS4 in recent years.

Now AMD’s big opportunity is coming from virtual reality, where the technology of today and yesteryear would be overly taxed and unable to perform. Then there is artificial intelligence and machine learning, and then there is the semi-custom business opportunity to boot.

Admittedly, it has to sound weird, or at least counterintuitive, that AMD shareholders should feel good about AMD’s value just dropping 6% to $6.88. AMD’s 52-week range is $1.65 to $8.00, and the consensus analyst price target from Thomson Reuters is now $5.92.

24/7 Wall St. wanted to show both sides of the coin here to keep this more objective. With such a move in the stock, a breather and a back-and-fill period might be what is needed. Keep in mind how much the stock has run up, and think about whether shareholders should be thankful that a company raised cash after its value tripled or when it was on its you-know-what. A look at several analyst notes on both sides of the coin has been included.

BMO Capital markets addressed a wafer supply agreement change at the end of August, before this debt/stock sale news broke. BMO has a Market Perform and just a $5.00 price target, but it said:

AMD announced that it has entered into a 5-year amendment to its Wafer Supply Agreement (6th amendment to the WSA) with GLOBALFOUNDRIES (GF) effective CY16. AMD expects to collaborate with GF on 7nm technology and while AMD retains the flexibility to manufacture products with other foundries, it comes so at an additional cost. The agreement sets annual purchase targets thru 2020, fixed wafer prices for 2016 and a framework for yearly wafer pricing.

J.P. Morgan has a Neutral rating, and it also opined at the end of August:

Other than the manufacturing flexibility, it’s difficult to determine additional financial benefits of the 6th WSA amendment AMD may obtain versus prior amendments.

Credit Suisse has an Underperform rating, and they warned that the successes of 2017 have to be proven. They also noted:

Issuing warrants that are ~2% dilutive to share count upon exercise at a 20% discount to current share price will likely pressure shares in the near term.

Canaccord Genuity has a Buy rating and has an $8.50 price target. Its take was that the long-term benefits of n-node supply diversification and roadmap credibility will outweigh dilution of its new Wafer Supply Agreement with GlobalFoundries. Their take at that time was to buy the weakness. Its report then said:

While we anticipate AMD shares will trade down near-term given the $100 million in cash and 75 million share dilutive warrants issued GlobalFoundries ownership to secure this agreement, we believe the long-term operational stability and increased customer confidence AMD will attain by adding additional sources of silicon supply will far out-weigh the costs of the agreement long-term. As such, our positive thesis remains intact and while we recognize that roadmap execution, competition and financial risks remain, we remain impressed with the new management team and still anticipate a quick recovery to solid profitability given prospects for topline growth given a much stronger product roadmap and due to lower expense levels necessitated by the company’s recent struggles. Finally, we believe risk/ reward for AMD shares remains unbalanced to the upside despite the recent stock move.

Here is a list of the underwriters named by AMD for its underwriting syndicates. Those firms will all likely be issuing update ratings and estimates in the days and weeks ahead. AMD showed these as follows:

J.P. Morgan Securities LLC, Barclays Capital Inc. and Credit Suisse Securities (USA) LLC are acting as joint lead book-running managers of the offering of the Shares. BofA Merrill Lynch, Wells Fargo Securities, LLC, Deutsche Bank Securities Inc. and Morgan Stanley & Co. LLC are also joint book-running managers for the offering of the Shares.

J.P. Morgan Securities LLC, Barclays Capital Inc. and Credit Suisse Securities (USA) LLC are joint lead book-running managers of the offering of the New Notes. BofA Merrill Lynch, and Wells Fargo Securities, LLC are also joint book-running managers for the offering of the New Notes.