AMD: Lost in Transition

Shas 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), once predicted to be a strong competitor and only threat to semiconductor giant Intel (NASDAQ: INTC), has started to lose momentum recently. The main reason for the decline is the company’s inability to keep pace with the dramatically changing world of microprocessor chips. The sudden arrival and rise of smart gadgets such as tablets and smartphones and decline in PC sales have hit the company hard. In 2013, the PC sales are projected to decline even further owing to the recession in Europe and slow growth in developing markets like China.

The company is continuously losing cash as its margins are slipping on decreasing revenue. Fitch, the credit rating agency, recently downgraded AMD’s credit ratings to CCC from B owing to the negative cash flow forecast for 2013. To reduce production costs and stabilize cash flow, it is in the process of laying off its workforce by 30% and decreasing inventory. In fact, the layoffs have been surrounded by controversy with allegations that skilled workers, especially engineers, were being laid off due to internal politics. Leaving that aside, the struggle to contest entrants such as ARM Holdings, which has become a major player in the fast growing smartphone market, is becoming more and more difficult.

In an attempt to recover the losing business, AMD is exploring opportunities in new markets with its new line of products, notably chips codenamed “Temash” & “Kabini,” which are high performance and low power consuming chips suitable for tablets and smartphones. AMD intends to compete with Nvidia’s (NASDAQ: NVDA) Teagra 3 chip, which is based on ARM core as well. The major problem with AMD here is that Nvidia is already ahead in this arena and has launched the Teagra 4 processor with 72 cores, and the new launches by AMD have already been marked irrelevant by some analysts. But there are some positives helping the company stay afloat as well. Most importantly, its server business, which focuses on very high end data centers, is not doing as badly as others are and is growing at a healthy rate. The company is providing processing power to organizations such as Facebook, Google and Amazon.

AMD recently declared its fourth quarter results and topped analyst estimates, mostly backed by server business gains. Total sales were $1.12 billion against the prediction of $1.15 billion from analysts. Losses were also contained to $102 million or 14 cents a share against the average analyst prediction of 18 cents. The actual loss figure stands at $473 million, but it had restructuring costs of $90 million and the $209 million cost of writedown of Globalfoundries. The gross margin figure, which is an important component of the earnings in the chip maker industry, also dropped sharply to 15.4 % from 45.7%.

More bad news lies on the PC business front, which serves as its bread & butter; revenues fell by 37%, and it has turned to an operating loss. The rivals are not doing well either. Intel reported a reduction of 27% in its profits while Texas Instruments reported a contraction of 11% in its profit.

The major concern for AMD is the reducing cash balance, which has dropped to $549 million from $779 million a year ago. This will make it difficult for the company to fund its future research projects, which in turn will make it hard for it to compete with majors such as Intel who are sitting on huge cash pile and have big investment plans for the current fiscal year. However, the company is trying hard to ensure a better cash position by the end of the current financial year and is on the right path to cut operational costs by 25%. In my opinion, the target of 25% reduction is very optimistic given that it will have to pay a hefty fine to Globalfoundries (it reduced its order of processing semiconductor wafers in order to reduce inventory).

AMD's stock price has tanked from $8 to $2 in the past year, suggesting decreasing investor confidence, and the Q4 results were not able to change this sentiment. Even at the current valuation the stock looks unattractive due to the troubles the company is slated to face in the future. One of them is the long term debt bond worth $780 million due to be paid in 2015 with a YTM of 9.629% (significantly higher than the current YTM of 1.86% for 10 year Treasury bonds). Effectively, this means that the company will be in a very difficult cash situation in 2015 if it keeps losing cash at the given rate. It is not a very significant short term risk though, as it can always raise new debt to cover this bond.


The future is difficult. It is filled with intense competition from all the sectors in which AMD operates. The company doesn’t seem to be ready to face the market due to its rigid product line. It has taken measures that include forming an alliance with ARM to gain share in the smartphone market, but the success of this will heavily depend on how other competitors, including Intel, play their cards and how the company is able to manage its cash. 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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