Advanced Micro Devices: A Comeback Story ?

Cagdas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Advanced Micro Devices (NYSE: AMD) lost nearly 80% of its market value in the past year. The company also ended the year with substantial losses due to the massive structural changes in the market. Advanced Micro Devices has lagged behind its peers in adopting the most recent trends. However, it is good to see that the company is going after the market and taking new measures to cope with competition. In this article, I dig deeper into the company's recent financials and restructuring efforts to prove my point.

 

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Source: Finviz.com

Recent Financials

AMD's financial situation is not pleasing at the moment, as it is facing substantial headwinds. The company's business environment is changing at an immense pace. For example, the company lost the microchip battle to the industry giant Intel (NASDAQ: INTC). Although the company realized necessary changes, the company posted significant losses year after year. Its shareholders were also highly disappointed as the company's market cap was decimated since the sub-prime crises. Intel showed a relatively poor performance in 2012 due to lack of growth in personal computer units in emerging markets, and it was still better than Advanced Micro Devices. Now that prospects are strong in 2013, it will be harder for AMD to reclaim its position in the industry.

Along with field performance, Intel is also in a much better position than AMD in terms of balance sheet. Intel has a Beta value of 1.02, while AMD is at a concerning rate of 2.25. Intel's dividends are very stable and robust (dividend yield rate at 4.21%), wheres Advanced Micro offers no dividends at all. Intel's total assets are increasing for the last five years straight. Advanced Micro Devices, on the other hand, has a very uncomfortable assets line. Intel shows no red flags in its key stats, and pays consistent dividends to double your pleasure. 

At the end of 2012, Advanced Micro Devices lost nearly 17% of revenue compared to the previous year. For the full year, the company's revenue stands at $5.42 billion. The company's operating loss stands at $1.06 billion, which is an enormous loss in the challenging environments. Moreover, the company's gross margin contracted by 4% compared to earlier years.

The company lost an enormous amount in operating expenses, burning $2.2 billion in its business operations. However, management is taking initiatives to reduce operating costs. AMD is looking to cut its expenses by $450 million by the end of 2013. I think the cost reduction measures can lead the company back to profitability.

At the end of 2012, the company's net losses stood at $1.18 billion. Moreover, its cash balances decreased compared to earlier periodsdeclining by $297 million. At the end of last year the tech stock generated cash reserves of $1.1 billion. The company's cash balance adequately covers its business obligations. Actually, Advanced Micro generated positive cash flows from operations, but free cash flows are negative at $308 million.

At the same time, the company initiated a restructuring program. Obviously there is a risk that cash could be burnt off if the sales keep going down and the company pays substantial restructuring costs. However, in the case of the company, it looks like it needs to change operations to adopt with shifting market conditions. At the end of Q4, the company spent $90 million in restructuring efforts. Let's dig into the company restructuring efforts to explore future possibilities.

Restructuring Efforts

Advanced Micro Devices neglected the speed of change in the computing industry. Nonetheless, the company comprehends the urgency of required restructuring. The company announced a restructuring plan to strengthen the company's competitiveness, and cut its operating expenses by 25 percent. In an effort to reduce costs, the company plans to cut its current workforce by 15%.

Moreover, management planned several strategic moves to generate positive cash-flows in the long-term. The new business plan is straightforward. The company will stop battling with Intel in the already lost microchip market. Instead, Advanced Micro Devices plans to diversify its line of products. The company has a plan to generate only 40 percent to 50 percent of its revenues from the traditional PC space. It is expecting to generate the rest of the revenue from the other business.

The company looks to expand throughout the PC market. Thus, the company is focusing on the alternate markets, such as new embedded markets and dense-serving segments. As such the company intends to make 40% to 50% of its revenues from quickly growing markets in the future.

Advanced Microchip vs. Competitors

Intel is the absolute leader in the processors market. Intel continues to capture shares of the PC market, though the margins in the PC market keep shrinking. Intel offers a dividend yield of 4.07%, which is enormous in the tech industry. The drop in Intel's returns is due to the strike Intel faces from macroeconomic conditions. Intel itself seems to be doing exceptionally well in this environment.

NVIDIA (NASDAQ: NVDA) is also a prominent competitor of Advanced Micro Devices. Nvidia produces a few of the leading graphics cards in the market, but the firm also creates processors for tablets and phones. Moreover, Nvidia nearly has half of its market capitalization in cash, making it the perfect stock for investors chasing nifty cash reserves. Unlike Intel, Nvidia is a relatively easier opponent. The company is likely to be pretty dead money in the near-term as it has little to offer in terms of short-term growth. If you want to go for long-term gains it would be okay, but profits from Tegra product line are going to be a long story.

NVIDIA's Beta value is 1.49, roughly in the middle of the two stocks compared above. The company's has significant red flags on key stats like ROE (Return on Equity) -11.6%-, way below the industry average of 20.2%. However, cash flow and assets are increasing at shocking rates over the last couple years. NVIDIA is increasingly focusing on the smartphone and tablet industry, which will surely add to its cash flow. 

Like I said, you can not wait much in the near term from this graphics chips maker. If you are willing to hold NVIDIA shares till the end of 2014 or 2015, I would recommend you do that. For now, this stock could be profitable in the long-term only.

Summary

At present, AMD's financial situation is not stable. The company is highly leveraged. The weakness in the international PC market has also set pressure on demand for the corporation's processors. Thus, I predict the dull performance to continue for the next few quarters. Nevertheless, the stock looks like a cheap deal, as it is trading at a fraction of its heyday valuation. I believe the restructuring plan is critical for Advanced Micro Devices. The restructuring plan can turn the company around. The cost cutting measures can turn the company back to profitability. There is also this possibility that its cash rich competitors can also make an unexpected take-over offer.


BargainReporter has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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