AMD: Evolving with a New Game Plan

Nur 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) has distinguished itself over years as Intel’s (NASDAQ: INTC) sole rival in the PC microprocessor market. Despite never overtaking the chip giant, AMD has managed to keep its own share of desktop and server sales. Over the last decade, it has gone through massive transformations and continues to expand its businesses to remain competitive. The company now faces a more volatile future as mobile computing causes a shift across the entire microprocessor sector.

Dealing With Declining PC Sales Growth

A weak outlook for new PC sales has been casting a very dark shadow over the entire PC hardware industry. Both AMD and Intel, have been hurting as smartphones and tablets gain favor among consumers. Hardware partners like Dell (NASDAQ: DELL) and Hewlett Packard (NYSE: HP) also share similar problems brought about by the mobile computing revolution.

Meanwhile, mobile chip companies like ARM Holdings (NASDAQ: ARMH), Qualcomm (NASDAQ: QCOM) and Taiwan Semiconductors (NYSE: TSM) have been growing tremendously over the last few years. Their stock prices have also been soaring sky high whilst many traditional PC companies suffer with depreciated valuations.

AMD’s stock price is at rock bottom as investors and analysts see sales, as well as profit margins, tumble down. The company also recorded operating losses for the second year in a row in 2012. Its microprocessor market share has also shrunk to a low of 17% compared to Intel’s dominance at 83%.

Even without the current threat of mobile, AMD has not had an easy last couple of years. Its CPU offerings have not had much success over Intel counterparts. Its last significantly competitive product dates back to the first generation Athlon line of 64-bit processors. Financial dilemmas, as well as engineering and manufacturing road blocks have plagued AMD’s operations for most of the last decade.

The New and Improved AMD

In the midst of all the negative news from the traditional PC industry, AMD has made some bold moves. During the recession of 2009 it spun off its manufacturing arm, now called Global Foundries, and going fabless. Through this transition, the financial burden of maintaining wafer fabrication facilities was removed and its debt levels became more manageable.

AMD has also recently ended its manufacturing exclusivity deal with Global Foundries, enabling more production and design options. The company can now better address manufacturing commitments and engineering issues that directly affect current and future products. Like other fabless semiconductor companies, it can choose the best solution available from established suppliers like Taiwan Semiconductor. It eventually expects to return to free cash flow generation by the second half of 2013.

Another effort to reduce costs that is still ongoing is through workforce reductions that are expected to save the company hundreds of millions of dollars. Even its Austin office campus is being sold off and leased back to further minimize costs. All in all, the company expects to reduce costs by up to 25% by the third quarter of 2013.

Success With Value Products and Graphics Performance

PC chip sales represent the bulk of AMD’s business at roughly 75%. It remains competitive to Intel only in certain classes of products particularly leaning toward the low to mid-priced segments.

Its past acquisition of ATI has been instrumental in providing additional value to its product offerings in this regard. Consumers are able to take advantage of exceptional computing and graphics performance for a relatively low price. AMD continues to aggressively develop its Advanced Processing Units or APUs which integrates advanced graphics power into one chip.

Intel is still playing catch up in packaging a similar low cost solution with similar graphics performance. Even its newest HD4000 Integrated Graphics Platform, or IGP, is still only suitable for basic to medium-level graphic operations.

AMD Powering Next Gen Consoles and New Tablets

The upcoming Jaguar APUs are already slated to be used in the next PlayStation 4 and Xbox 720 releases. Nintendo also uses AMD Radeon in its current Wii U game system. It clearly has been able to capitalize on its graphics technology IP with its monopoly of the latest generation consoles.

These design wins in next generation of consoles may also become a future catalyst for its discrete graphics business. Developers will likely optimize games for AMD graphics cards better as console titles are ported to the PC format.

AMD also enjoys a much healthier market share in the PC graphics arena with NVidia being its only other significant rival. The latter’s lead with its current generation discrete graphics cards is not as significant as Intel’s in the processor arena.

NVidia (NASDAQ: NVDA) has also been successful at transitioning their product development into the ARM-based mobile market. It has enjoyed good adoption rates of its Tegra System on Chip platforms. Though the latest iteration of Tegra 4 has seen less model releases compared to established leaders like Qualcomm and MediaTek. Meanwhile, AMD has yet to introduce its own mobile offerings supporting which are expected to compete in the higher priced device range powered by a Microsoft OS.

New Low-Power ARM-Based Servers

At the other end of the computing spectrum, AMD has licensed an ARM microprocessor design for a low-powered 64-bit server solution. One of its more significant acquisitions since ATI has been server maker SeaMicro. It specializes in energy efficient products based on fabric technology, which interconnects multiple smaller units to deliver high bandwidth operation. By combining low power ARM designs with SeaMicro’s fabric, AMD is banking on future demand from small to mid-sized data centers. AMD will include these servers in its Opteron family, which users have ignored in favor of Intel’s Xeon chips.

The SeaMicro acquisition will inevitably help revitalize AMD’s server business. By releasing new x86 and ARM-based Opteron products into the market, new sources of revenue are generated. Compared to personal computers, the server business is more lucrative and also significantly larger in terms of size. Initial shipments of SeaMicro systems have already been showing promise. As more Opteron technology is used in newer server releases, AMD might just begin to penetrate the enterprise market.

The Road Ahead

AMD is still a wait and see story. It has spent the last couple of years transforming itself into a more profitable organization. Drastic organizational changes are still occurring and financial restructuring is obviously a priority.

The decline on PC sales growth will definitely not make the future any easier for the chip company. It’s main rival Intel, however, is also facing problems with decreasing demand as well as underutilization in its chip fabs.

Aside from cost savings, the future of AMD lies in the success of its new products in other segments of the electronics industry. It has already had initial success with its APU design wins for the top game console makers. The performance and demand for its tablet offerings and low-power servers have yet to be seen. These will take well into 2014 before new products and any improvement in the bottom line can be seen.

AMD has had a rough journey to get to where it is at now. It will never be able to take on its main rival, Intel, head to head in the PC and server chip segment. The company’s financials do look much healthier now and austerity measures are having a significant impact. Product diversification is a key to the company’s survival as technology becomes more mobile and turn to low-power devices. Any upside to its stock price will only come about once its new ventures actually start contributing revenue. 

Nur Tarkak has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and Qualcomm. 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!

blog comments powered by Disqus