n my previous article on chip-maker Advanced Micro Devices, Inc. (NYSE:AMD), I had made a quick mention of how the company attracted top-level talent in an attempt to fine-tune its efforts towards the SoC (System-on-a-Chip) integration process. And now, it seems this beleaguered tech company is on the correct path to recovery as Redmond-based Microsoft Corporation (NASDAQ:MSFT) announced that it will utilize AMD processors for its next generation Xbox game consoles.
Game on, guys!
Show me the money
And Advanced Micro Devices, Inc. (NYSE:AMD) badly needed this latest boost to its efforts to move away from the steadily declining PC industry. The company has already witnessed a steady decline of its top and bottom lines, along with a negative profit margin, as global computing trends have tended to move away from PCs and more towards smartphones and tablets. The shift has also affected AMD’s rivals Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA), but their cash positions have not been as precariously placed as with AMD.
As things stand at the moment, Advanced Micro Devices, Inc. (NYSE:AMD)’s cash pile has dwindled down to slightly more than $1 billion, and the company’s steady losses have led some market observers to predict a possible future situation of bankruptcy. As the PC industry is headed for a further downslide even this year, AMD is trying to make up for the cash shortfall by indulging in mass layoffs and also selling company assets, as highlighted by its Austin campus deal recently.
Competition’s a tough nut to crack
That apart, the company has to constantly deal with some heavy competition, with Intel Corporation (NASDAQ:INTC) being a particularly tough and dominating opponent. With almost a 96% share of global PC-based processor sales, Intel tends to dwarf Advanced Micro Devices, Inc. (NYSE:AMD) whose share is a meager 4%. And while Intel has billions of dollars to ride over the crisis and instead plan aggressive expansionary moves to counter it, AMD is obviously at a huge disadvantage.
The two companies also have totally different chip sourcing procedures. While Intel Corporation (NASDAQ:INTC) has foundries of its own that produce cutting-edge processors as per its requirements, AMD does not make its own chips and instead sources them from third-party manufacturers such as Globalfoundries Inc. and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM). The way I see it, this is a definite advantage for cash-strapped companies like AMD, as it leads to hugely reduced running costs. While there is always the risk of running into sourcing constraints, given that it has to depend on third-party suppliers, at least AMD does not have to worry about generating enough demand for its chips so as to offset the huge costs of running its own foundries like Intel.
With NVIDIA Corporation (NASDAQ:NVDA), it’s a totally different story. While admittedly NVIDIA has had a better run as far as the graphics processing unit (GPU) business is concerned, AMD’s Radeon series of processors seem to have taken a very recent lead over NVIDIA’s GeForce series. That’s because AMD’s Radeon processors are now powering Sony’s Playstation 4 as well as Microsoft’s upcoming Xbox, after having successfully displaced NVIDIA in these areas. At the same time, NVIDIA Corporation (NASDAQ:NVDA) continues to have a strong hold over the tablet market, putting AMD at a relative disadvantage.
Microsoft Corporation (NASDAQ:MSFT)’s bright idea
At the same time, the integration of Advanced Micro Devices, Inc. (NYSE:AMD)’s processors into its forthcoming Xbox console has been a smart decision on behalf of Microsoft. This is because using AMD’s processors will lessen the initial cost of making these machines, a benefit that is also being enjoyed by Sony Corporation (ADR) (NYSE:SNE) now. With this decision, Microsoft has moved away from the earlier Power PC technology that was prevalent in the Xbox 360 and into the x86 technology that powers today’s computers. At the same time, Microsoft can also hope to attract more game developers that actually design games for the smartphone and tablet segments. AMD’s SoC integration will now make it easier for them to design newer games for the upcoming Xbox.
Going in the right direction
At the end, Advanced Micro Devices, Inc. (NYSE:AMD) still has miles to go if it hopes to make a decent turnaround. However, the company seems to be taking baby steps towards a possible recovery. Having said that, it’ll take much more than the current wins to reduce its still overwhelming dependence on the sagging PC industry, and to add to its troubles, the video game market itself does not seem to be in very good shape. That’s because the trend is increasingly towards online and mobile gaming, a fact which Microsoft Corporation (NASDAQ:MSFT), Sony and Nintendo are all aware of.
The decision by Microsoft Corporation (NASDAQ:MSFT) is undoubtedly a big design win for AMD and its crucial wins in the gaming console market should stand it in good stead. At the same time, the company is going all-out to cut costs, as it searches for new avenues of growth. This is one stock that is priced real cheap right now, and it’s got good prospects for recovery. Time to have a re-think on this one, maybe.
Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA). The Motley Fool owns shares of Intel and Microsoft.
