“We’re looking at a tale of two chip makers. Advanced Micro poised to get an even bigger chunk of Intel’s chip business. Citi upgrading AMD to a buy from a hold saying the semi-maker could steal even more share in the future. Barron’s agreeing wholeheartedly with that thesis. Already AMD’s won key contracts from its main customer, PC-maker Hewlett-Packard. In fact, HP recently canceled some of its programs with AMD’s arch-nemesis Intel. Meanwhile, Citi doesn’t think AMD can unseat Intel for the number one spot just yet. The firm does see room for stabilization there.” — CNBC’s Closing Bell 8/24/2009

Advanced Micro Devices (AMD) received an upgrade today from Citi, and the stock soared up more than 8%. The stock had been pummeled over the past couple of years because of continual quarterly losses, and there are still concerns over the substantial debt load. However, according to the analyst Glen Yeung at Citi the stock could be a steal at this level, and he has raised his price target to $5.50 from $4.25 and now has a “Buy” on the shares.

AMD The catalyst for the upgrade is that he sees AMD beginning to take a larger market share from rival Intel (INTC). He also sees gross margins improving from their 2Q levels, and thinks that the consensus estimates are overstating the losses for the second half. More than anything, Yeung sees a favorable risk to reward in this stock, because it is currently trading at only 1.25x EV/sales, which is just over half of the semiconductor industry average.

For our analysis, we are still neutral on AMD shares at this point with a Fairly Valued stance. While we do see a good bit of potential price appreciation for AMD, there are still nagging concerns. First, the valuation is a positive, we would expect AMD to be priced around $5.52 in order for it to trade for the average of the hi and low range of price-to-sales and price-to-cash earnings that it has historically traded for over the past ten years. Coincidentally, that is just about the same level as Yeung’s price target. However, at present the are just too many red flags for this to be a buy according to our methodology. For starters, the balance sheet is far too debt burdened and actually has negative shareholder equity. Shareholder equity has been in a steady decline and turned negative two quarters ago. Also, it is especially troubling for a company to have this much debt when it is not able to turn a profit. 10 of the last 11 quarters AMD has shown a loss, a problem that consensus estimates suggest will continue through the second half of 2009 and into 2010.

So, even though AMD may be starting to turn a corner, it is not a stock that we would consider recommending. Shares are cheap historically speaking, but to buy into this stock would mean investing in a company that is not profitable and has a low quality balance sheet. In this case, there may be upside potential for the taking but we would prefer to leave it on the table and put resources to work with companies of better financial strength.

Plenty of Upside for AMD?