AMD has been affected by declining PC sales, but it is slowly transforming its business. It has a target of increasing the sales of embedded and semi-custom processors to 20% by 4Q13. From a longer perspective, it plans to generate 40% to 50% of its revenues from high growth markets like dense servers and embedded and semi-custom processors. This is indeed a big target, but will the company be able to hit it?
What went wrong?
Advanced Micro Devices, Inc. (NYSE:AMD) derives approximately 74% of its revenues from traditional computing solutions; hence any changes in the PC market will invariably have a drastic impact to the company. That’s why the company has been facing declining revenues as a result of a decrease in global PC shipments. This is a result of cannibalization from tablets and new mobile devices as well as, to an extent, the weak consumer demand of the Windows 8 OS. A recent report by IDC shows a 13.9% decline in first quarter PC shipments, the worst decline since 1994.
A second issue was the manufacturing glitch by GlobalFoundries in 2011. GlobalFoundries, in which Advanced Micro Devices, Inc. (NYSE:AMD) had 34% stake, faced manufacturing issues that affected the shipment of its next generation Interlagos, based on its bulldozer architecture. Since then Advanced Micro Devices, Inc. (NYSE:AMD) has reduced its share to 8.8% in GlobalFoundries and agreed to pay $703 million as a onetime charge for the amendment of the agreement.
The third problem is increasing competition. Advanced Micro Devices, Inc. (NYSE:AMD) consistently lives under the shadow of the giant Intel Corporation (NASDAQ:INTC) , and is also facing increasing competition from NVIDIA Corporation (NASDAQ:NVDA) in the graphic processing unit (GPU) market. It did launch a number of compelling products, but faced headwinds. Its Bulldozer architecture was not only launched late into the market but also did not meet expectations on the performance and power parameters. Further, as it failed to sell its Llano APU it incurred a $100 million inventory write-off in 2012.
What can it do to make things right?
Success of its new products is the only way through which the company can arrest the bleeding in its profitability and cash. On its recent earnings call, the company mentioned that it is entering a significant product launch cycle. It aims to retake share from Intel Corporation (NASDAQ:INTC) mainly in the entry-level PCs segment and regain its market share in the GPU market from NVIDIA Corporation (NASDAQ:NVDA).
For 2013, a large portion of its momentum is expected to come from game consoles. It has entered into deals with Microsoft, Nintendo and Sony to provide chips for its game consoles. Sony’s PlayStation 4 will be powered by Advanced Micro Devices’ semi-custom accelerated processing unit, and Microsoft’s Xbox 720 will operate under its Jaguar’s 8-core CPU. The graphic processor of Nintendo’s WII U is powered by Advanced Micro Devices, Inc. (NYSE:AMD). Though the product has met with lukewarm response, it is expected to generate millions of sales this year. In all the company expects to ship 40 million game consoles in 2013.
In an attempt to break free from dependence on the PC market, the company is increasingly focused on expanding its coverage in the tablet computer segment. It has developed a TurboDock technology that automatically adjusts the power supply according to the user’s usage. This technology will definitely add fuel to Advanced Micro Devices’ success, as it is foreseen as a new trend in mobile computing.
As the company’s products meet with success combined with its increasing hold on game consoles, the company will definitely improve its financial position. With the above the company is on the right track to reach its target of 20% of revenues from embedded and semi-custom chips, as mentioned earlier.
What are competitors doing?
However, its competitors Intel Corporation (NASDAQ:INTC) and Nvidia are constantly developing new products and are taking advantage of Advanced Micro Devices, Inc. (NYSE:AMD)’ loss of market share.
In the smartphone and tablet market, while Advanced Micro Devices and Intel Corporation (NASDAQ:INTC) are still trying to gain a foothold, NVIDIA Corporation (NASDAQ:NVDA) has already dug its heels.
Nvidia has its own virtual game store for Android games – “Tegrazone.” It also manufactures the Tegra processors for cars, and management projects that it will generate $450 million by 2013. Besides this it has been consistently developing various game consoles like Project Shield, which is to be released in 2Q13. In the visual computing technology space, it plans on introducing a new product line called GRID, and the company believes it is a $10 billion opportunity.
As for Intel Corporation (NASDAQ:INTC), a recent report by Bank of America indicates that Intel will have strong momentum in the second half 2013, taking away market share from Advanced Micro Devices, Inc. (NYSE:AMD). The company plans to achieve this through its Haswell chips, which will bring about a substantial increase in efficiency and blur the lines between mobile and desktop processors. Although the company reported a 3% decline in its first quarter revenues due to market softness, it has a robust pipeline of upcoming platforms that will help it have a better second half of 2013. The company is increasingly focusing on developing convertibles and detachable ultra-book designs. In the next couple of months, it plans to introduce more than 140 core-based ultra-books, out of which around 40 will be touch-based.
Another front on which Advanced Micro Devices, Inc. (NYSE:AMD) falls back is R&D and its cash flows.
Intel Corporation (NASDAQ:INTC) is known to have the best in class R&D capabilities. In 2012, it purchased $11 billion in capital assets and spent $10 billion in R&D. Furthermore, in July 2012 it invested $4.1 billion in ASML Holdings to jointly develop the next-generation of chip-making technology. In contrast, Advanced Micro Devices, Inc. (NYSE:AMD) invested only $1.3 billion in R&D in 2012, down 6% versus 2011. In addition, Advanced Micro Devices is bleeding cash and has posted an operating cash outflow of $338 million in 2012. The company was able to maintain its cash balance within its target mainly due to the leaseback transaction for its Austin campus through which it generated $164 million in cash. On the other hand, Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA) both have deep pockets, which help it fund each company’s research. Advanced Micro Devices’ declining cash flows is the one area which has many investors worried, with some even thinking that the company is no longer a concern.
Conclusion
From the above, it is easy to derive that Advanced Micro Devices, Inc. (NYSE:AMD) is going through a tough phase. The company’s survival is now solely dependent on the success of its upcoming products. But I still wouldn’t recommend selling the stock just yet. To support my viewpoint, most research analysts also maintain a buy rating and not a sell on the stock (source: Yahoo! Finance). So, if you have the patience, hold the stock and keep a close watch on its product acceptance.
The article What Went Wrong With Advanced Micro Devices? originally appeared on Fool.com and is written by Shas Dey.
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