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Long/Short Investments in L/S Equity: Valuation and Ideas,

Advanced Micro Devices (AMD) Likely to See Earnings Volatility

Advanced Micro Devices (AMD) is a producer of computer processors and technological solutions for personal computers, game consoles, and cloud storage servers.

AMD will release Q2 earnings after the market close on Thursday 7/21, and is expected to post EPS and revenue figures of approximately -0.10 and $950 million, respectively. AMD has historically exhibited plenty of volatility post-earnings and the market is largely predicting the same for Thursday. Options prices on the stock imply earnings volatility results of upwards of 20%. AMD has had a recent history of failing to meet EPS expectations.

Despite concerns regarding its graphics business, AMD is one of the best-performing stocks on the market this year. The stock is up nearly 90% YTD and 200% over the past year.

The company’s bonds are yielding 8%-10% for 2019-2024 maturities (source: Morningstar). They come in at a CCC rating by S&P (i.e., high-yield or junk status), reflecting a certain level of distress potential in the company. Some of its debt was trading at over 19% just this past February and under 60 cents on the dollar and maintaining around 16% for a nine-month period that ended in late March. Combined with the overall issues in the market over the past year, this makes the recent strong run-up in the stock price all the more impressive.

Despite the strong yield on its bonds and the perhaps overbought status of its stock, AMD almost sounds like a viable “capital structure arbitrage” opportunity – shorting the common stock while hedging with 8%-10% yield on its bonds. However, in just about every model-able scenario, the company’s debt appears overvalued, while its stock price jumps around from fair priced to overvalued to some degree. The bonds were a better value earlier in the year and I still wouldn’t feel completely comfortable betting against the stock, as I don’t have any particularly keen insight into the direction or extent the stock will break post-earnings.