Advanced Micro Devices, Inc. (NYSE:AMD) is an American semiconductor company. It manufactures computer processors and technology devices. Its main products are motherboards, microprocessors, chipsets and graphic processors.
AMD has been in trouble due to falling sales in the PC industry, its primary client. This is the very reason AMD shares have under-performed in the last few quarters. In a recent move, the company is trying to establish its presence in the gaming- console industry. This is one of the primary reasons that AMD shares have begun to rally once gain. The imminent launch of the new Xbox and PS4 will have a significant impact on AMD’s valuation.
Financial overview
In the first quarter of 2013, Advanced Micro Devices, Inc. (NYSE:AMD) reported a net loss of $146 million, down by 69% over the previous quarter, and revenue decreased by 31% year-over-year. Revenue from the computing-solutions segment decreased by 9% sequentially and by 38% year-over-year. This revenue decrease was primarily due to lower desktop, notebook and chipset-unit shipments.
Revenue in the graphics segment increased 3% sequentially and decreased 12% year-over-year. In the first quarter of 2013, the gross margin improved to 41% as compared to 15.4% in the last quarter of 2012.
Shares of Advanced Micro Devices, Inc. (NYSE:AMD) are currently trading at $4.07. Over the last two months, the share price has increased by almost 55%, recovering after trading below $3 late last year.
Competitive analysis
In the first quarter of 2013, the overall PC processor market was reduced by 7.8% as compared to the fourth quarter of 2012. According to the latest reports, AMD’s market share fell nearly 6%. Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA) are the primary competitors of AMD.
Intel’s latest innovation, the Haswell 22-nanometer processor, poses a real threat to Advanced Micro Devices, Inc. (NYSE:AMD) and NVidia. Regarding the Haswell processor, Intel’s CEO Paul Otellini said:
“The single largest generation-to-generation battery life improvement in Intel history.”
There is high demand for energy-efficient products, but not in the gamers’ market, which focuses only on performance. Intel Corporation (NASDAQ:INTC) is also now targeting the smartphone market and increased its focus on developing new chips for smartphones.
NVIDIA Corporation (NASDAQ:NVDA) is also expanding its market share in tablet/ARM space. With its Tegra line, Nvidia has had a number of victories in the tablet market. Now Nvidia has moved to Tegra 4/Tegra 4i, and expects good revenue from these lines in Q3.
Advanced Micro Devices, Inc. (NYSE:AMD) is trying to establish itself as the biggest player in the gaming market whether consoles or PC. The company has introduced a new range of chips for gaming devices, and said that it hopes that 20% of its revenue in Q4 2013 will come from that market as compared to 5% currently.
Future of AMD
The future growth of Advanced Micro Devices, Inc. (NYSE:AMD) depends on its partnership with Sony Corporation (ADR) (NYSE:SNE) PlayStation 4 and Microsoft Corporation (NASDAQ:MSFT) Xbox 720 console systems for next generations. According to the latest news, it is confirmed that Sony’s PlayStation 4 and Microsoft’s Xbox 720 have chosen AMD processors for the next-generation consoles.
In the last few years, the overall demand for gaming consoles has decreased due to the introduction of high-performance PC’s and mobile devices. These gaming- PC devices lag far behind when it comes to supporting high-resolution games. The future of gaming consoles is looking bright due a major console-refresh cycle, which will have a major impact on sales.
The Sony PlayStation 4 is going to be released soon, which now contains a camera system equipped with wide-angle lenses and body movements to play games more naturally. Although Sony Corporation (ADR) (NYSE:SNE) has not announced a release date for PlayStation 4, investors should expect it to hit store shelves by the holiday season. Microsoft Corporation (NASDAQ:MSFT) didn’t mention an Xbox release date during its reveal event in Redmond, Wash., but it is expected that Microsoft Xbox 720 will arrive in time for Christmas 2013.
Conclusion
There is a possibility that Advanced Micro Devices, Inc. (NYSE:AMD) could return to profitability in the future because its focus on cost control will improve the bottom line. Long-term improvements in AMD shares depend largely on the sale of Sony PlayStation 4 and Microsoft Xbox 720 console systems. So it is difficult to predict anything now as investing in AMD could be extremely risky, but if the consoles sales are solid, AMD will rally.
The estimated EPS for the year ended 2014 is $0.03. Current industry and sector P/E ratios are 45 and 29, respectively. The target stock price is between $0.87 and $1.35, while analysts’ mean price estimate is $2.90. This shows that the stock is currently overpriced. I recommend investors avoid the stock and assess the success of PlayStation 4 and Xbox 720.
Red Chip has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel. Red is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is This Chip Play a Good Bet? originally appeared on Fool.com and is written by Red Chip.
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