Not afraid to gamble to gain market share
Unfortunately, Advanced Micro Devices, Inc. (NYSE:AMD)’s current strategy is a costly one. To keep up with Nvidia, AMD recently unveiled its “Never Settle” campaign, which bundles ‘triple A’ (high budget) games with their graphics cards.
These bundles include new games such as Electronic Arts Inc. (NASDAQ:EA)’s Crysis 3, 2K Games’ Bioshock Infinite and Square Enix’s Tomb Raider. By bundling these games with cards that sell for less than $200, AMD is willing to absorb these costs – which will heavily weigh on expenses and margins – in order to reclaim lost market share from Nvidia. This is a dangerous strategy, considering AMD’s precarious financial situation, and is an ‘all-in’ strategy to contain Nvidia’s market share.
On the other hand, Nvidia has been offering game credit for popular free-to-play games with its graphic cards, which can be redeemed for in-game items and upgrades. This strategy carries much less risk than AMD’s bold tactic. Analysts believe that Nvidia’s free game credit will help boost its sales in Asia, where free-to-play games such as League of Legends are more popular than ‘triple A’ games, which are generally more popular in North America.
At this point in the game, Nvidia doesn’t need to be aggressive, and with $3.73 billion in the bank, the company can simply wait for Advanced Micro Devices, Inc. (NYSE:AMD) to exhaust itself and spend the remainder of its $1.00 billion on its futile effort to halt Nvidia’s gains. Analysts believe that AMD needs at least $750 million in cash to stay operational, so AMD could seriously be digging its own grave with its costly strategy.
Public perception
What concerns me the most about AMD is that its losing battle against Nvidia closely resembles its prior defeat at the hands of Intel. In 2006, AMD held 48.40% of the CPU market, nearly matching Intel Corporation (NASDAQ:INTC)’s 51.60%. Since then, those paths have diverged dramatically. I fear that Nvidia has already stricken an Intel-like blow against AMD, and that all AMD can do now is wait for its cash to bleed dry, which will force it into bankruptcy.
The public perception of Radeon cards as ‘second fiddle’ cards to Nvidia’s de facto standard ones is also damaging. Nvidia’s cards have added features, such as 3D vision and PhysX, which make Radeon cards look second rate by comparison.
Recent reviews of Nvidia’s GeForce 650 Ti Boost card against the comparably priced Radeon 7790 card have also been heavily in Nvidia’s favor.
The Bottom Line
In my humble opinion, AMD has bitten off far more than it can chew and is spending too heavily to reclaim its lost market shares from Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NYSE:AMD). Negative profit margins, rising expenses and a cash balance that dangerously teeters on the edge of a company shutdown are all reasons to stay far, far away from AMD. In other words, although investors often love underdogs like AMD, this underdog is just another stray dog. Try not to get bitten.
The article This Underdog is Just Another Dog originally appeared on Fool.com and is written by Leo Sun.
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