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Optimism in AMD? It's Overdone

Tickers in this article: AMD ARMH BRCM QCOM
Editor's note: This article has been updated to reflect AMD's stated first-quarter guidance. The previous version cited management's projected 9% first-quarter revenue decline as year-over-year, but the projected decline was actually quarter to quarter.

NEW YORK (TheStreet) -- Since reporting fiscal first-quarter results April 18, shares of beleaguered chip company Advanced Micro Devices traded as high as $3.99 (on May 9), a gain of 66%. Is it deserved?

AMD's results were better than expected, but this company still has far to go to catch rivals Qualcomm and Broadcom in mobile device dominance. Granted, management's new emphasis on the videogame industry should serve some near-term upside for the stock. This means that AMD's no longer on deathwatch.

However, with gains of 66% in a manner of weeks, investors still holding at this level are playing a game of chicken with their portfolios.

I like a good turnaround story as much as the next person. But jumping on AMD's bandwagon here after the company posted results that were (at best) "less bad" than expected seems overdone. It's hard to be impressed with a 6% decline in quarter-over-quarter revenue and a 32% decline year over year. Nevertheless, bulls jumped for joy that AMD beat estimates, while also forgetting that this was the second consecutive quarter of 30%+ sales erosion.

The company posted a non-GAAP net loss of 13 cents per share, or $94 million, which, after one-time charges, beat estimates of a net loss of 17 cents.

This is clearly a company with underlying fundamental issues. Meanwhile, rivals including ARM Holdings are posting record revenue in chip license and royalties that increased 24% and 33% respectively. The beneficiaries of this growth have been Qualcomm, which posted a 24% surge in revenue. Along with Broadcom, Qualcomm continues to dominate smartphones and tablets. What's left for AMD? Games aren't going to cut it. Management believes it will.

Regardless, AMD investors are filled with optimism. I appreciate that. However, given the company's lack of competitive leverage, I do wonder if management's aggressive growth strategy, which will likely arrive at the expense of better margins, can work in the long term. It's not as if AMD has been raking in the cash -- it's now posted four consecutive quarters of negative cash flow. It's a "lose if you do and lose if you don't" situation.