Should You Care About This Chipmaker?

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

Chip maker AMD (NYSE: AMD) seems to be in a rather precarious position at the moment. The company has been struggling to compete with the undisputed king – Intel (NASDAQ: INTC) in the computer and server space. Plus, its ominous absence in the tablet and Smartphone arena has left it way behind other chip companies such as Qualcomm and NVIDIA.

AMD’s Q3 revenue not only declined on a sequential basis, but also dropped by 24% from the previous year’s quarter. The company’s bottom line dipped into the red with a loss of $157 million for the third quarter alone. But apparently AMD's problems don't end there.

Despite being the peak holiday season for tech companies, AMD’s CEO claimed that the fourth quarter of 2012 will continue to be challenging, including the next few quarters as well.

But hey, AMD wasn’t the only one to suffer from weak numbers. Intel also saw its third quarter net income fall from 3.47 billion to 2.98 billion. However, the fall in Intel’s numbers don’t really signal trouble as much as it does for AMD.

Tough macroeconomic conditions, along with poor demand for personal computers have resulted in AMD’s shrinking revenue base. Not to mention the huge success tablets have turned out to be. More people are increasingly using portable devices such as Apple’s iPad to connect and compute on the go without having to access a bulky laptop or a computer. And if there are personal computer users out there most of them seem to prefer Intel. That explains why we saw Intel’s third quarter market share grow to 83.3% as opposed to 80.6% in the prior year period, while AMD saw a decline from 18.8% to 16.1%.

So what can we expect from this struggling chip maker in future?

Well, AMD recently made an announcement regarding its plan to use CPU technology commonly used in smartphones from ARM (NASDAQ: ARMH) to cater to the micro-server market. The plan is to release 64-bit ARM-based opteron server processors some time in 2014. AMD will use its recent acquisition of SeaMicro to integrate its innovative interconnect fabric technology into microservers.

For chip companies that lack Intel’s sheer financial muscle power, ARM can prove to be a great partner in developing next-generation of power efficient processors. This makes perfect sense for AMD, since taking ARM's help results in some much needed cash savings on the R&D front. Moreover, ARM is known for developing energy efficient but powerful smartphone processors which could be used in micro-servers. Microservers are all the rage now. The reason is because a cluster of smaller low powered processors can handle data more efficiently than fewer, more powerful ones.

But, while teaming up with ARM might seem like a logical thing to do in the short run, R&D expenditures shouldn’t ideally be axed in the long run on account of the sheer competition in the industry. However, judging from AMD’s $2 billion debt burden and just $1.3 billion in cash and equivalents, I’d say that the company has very few options on the table. And with ARM in the picture, AMD would still have a lot of ground to cover.

A Possible acquisition target?

Well, AMD could make a good acquisition target, but I fail to see why anyone would want to go head to head with Intel in the PC processor space. It simply cannot compete with Intel in the x86 processor market, it cannot compete properly in the graphics space either due to NVIDIA’s dominance, and even if it did try its hand in the overcrowded mobile processor market (in which it has little to no experience), I don’t see any improvement taking place in AMD’s fortunes any time soon.

Yes, AMD's microserver endeavors could reap some benefits, but with the expected release in 2014, things could get a lot worse for AMD before they get any better. Even at a tempting $2 per share, I’d still prefer to stay away from this ailing chip maker until I see a clear strategy with which the company can turn back to profitability.

So what do you guys think about AMD’s recent decision to partner with ARM? Feel free to leave your comments in the space below. 

kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend ARM Holdings and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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