AMD Had A Huge Thursday...But Should You Buy In?

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Shares of chipmaker Advanced Micro Devices, Inc. AMD jumped 16.14 percent on Friday, touching a high of $3.37, before closing a notch lower at $3.31. The stock is back over $3 for the first time in the past four months.

On Oct 9, 2014, the stock last touched these levels, opening at $3.03, touching a day high of $3.20 and closing at $2.95, recording 2.64% decline in a day.

Since then the stock has been trading within the range of $2.19-2.95. Yesterday's price marks a 47.8% rise from Jan 20, when it closed at $2.24.

Possible Catalysts for the Surge

Per reports of a Chinese site, International Online, Chinese company BLX IC Design is interested in acquiring AMD. AMD and BLX had together opened the AMD/BLX Computing Client Development Center in Beijing in Dec 2013. Advanced Micro appears to be a tempting target as its shares have fallen more than 57% in five years.

Advanced Micro is the world's second largest manufacturer of microprocessors but has recently lost ground to its larger rival, Intel Corp INTC. Though the company rearranged debt and reduced its costs through job eliminations, it continued to lose market share in personal-computer processors to Intel.

Of course, despite improvement in the overall PC market, the consumer market remains under pressure. As a major share of Advanced Micro's chips is incorporated into consumer desktops, it has not benefited much from the enterprise driven strength in PCs.

But according to Morgan Stanley analyst Joseph Moore, even though the company has not been performing well for some time now, the acquisition can see a number of obstacles. It could make AMD lose out on license deal with Intel, which would negatively impact AMD's businesses outside China. It could also disrupt  business with Sony SNE and Microsoft MSFT for the PlayStation 4 and Xbox One, for which AMD is the sole supplier of chips.

Bullish news stories are also doing the rounds. For instance, the recent article about AMD in Barron's which stated that the company has begun to make real progress in its efforts to pull itself out of the consumer PC slump. Its move to diversify the business and shift toward a more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are paying off well for the company. Also, its $1 billion investment in new business, cost streamlining and better prices on credit default swaps are helping the company align itself with the softer PC demand environment.

Barron's also stated that Dan Niles, an investor with AlphaOne Capital Partners, is bullish about Advanced Micro and believes that its shares could double to over $8 in 2015 if the company delivers revenue growth of $7 billion.

Another factor that could have impacted the shares of the semiconductor company could be the fourth-quarter earnings of peer company NXP Semiconductor which beat analysts' expectations.

Our Take

AMD reported decent fourth-quarter 2014 results with both the top and the bottom lines matching the Zacks Consensus Estimates.

In the quarter, Advanced Micro made good progress in diversifying its business into new markets, ramping up of PC and embedded design wins with key customers and improving its overall balance sheet. The company is trying to position itself strongly in the gaming market, which has enough potential to grow over the next few quarters.

Currently, Advanced Micro has a Zacks Rank #3 (Hold).