Which Way Is AMD Heading?

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

The tech sector has been buzzing with lots of exciting announcements. Microsoft announced its brand new gaming console, while Apple released new OS versions and its music service. Meanwhile, Advanced Micro Devices (NYSE: AMD) saw its arch rival Intel (NASDAQ: INTC) unveil a new power-saving range of chips under the title of Haswell. Among all these high profile announcements, AMD is looking a little lost and it is time to evaluate the investment potential of the company.

New revenue streams

AMD is not taking all the Intel announcements lying down. The company is targeting the microserver market with its new low-energy chips under the codename of Kyoto. It will be competing directly with Intel’s Atom range of processors, specifically with Centerton Atom S1200.

While Kyoto chips viz. Opteron X1150 and Opteron X2150 have been appraised better than the current Atom processors, Intel is scheduled to revamp its Atom processor range with Avoton chips, based on its Silvermont architecture. The processors are likely to have up to 8 cores and are designed to offer serious power and performance. Intel is expected to start shipping the new processors later this year. The processor behemoth is currently looking to reaffirm its top dog position in the industry and will provide tough competition to AMD.

AMD is taking a new direction with Kyoto chips, which are more GPU centric. The company seeks to get the chips incorporated in the servers managing low-computing intensive databases. Until Intel is out with its new Atom chips, AMD has a good chance of making its Kyoto work. The chips have already been chosen by HP for its Moonshot servers. Since AMD holds a weak position in the high-end server market, it makes sense for the company to focus on the microserver market.

Kyoto chips are also expected to serve as the basis for AMD’s upcoming ARM-based chips, though Kyoto uses x86 architecture, which is currently favored in the server market. It is expected to unveil ARM microserver chips early next year. With the new chips, AMD is on its way to re-establish itself in the servers market with specific focus on microservers.

Taking on the gaming world

On one end, AMD is taking on Intel and on the other hand, it is fighting a tough battle with NVIDIA (NASDAQ: NVDA) in the gaming console sphere. AMD now powers the ultimate trifecta of gaming consoles viz. Xbox, PlayStation and Wii. While there had been concerns about declining demand of gaming consoles as a whole, but the projections so far look promising.

AMD is custom designing chips for these consoles and the pre-orders for PS4 and Xbox One are impressive, with PS4 leading the race so far. Sony recently upped its sales projection for PS 4. While the company refused to quantify the projections, rumors suggest that Sony may be gunning to ship about 16 million units of its new game console in 2013 itself.

Amazon announced that PS 4 is already at the top of its bestselling videogame products list. All this means higher revenue and profit for not only Sony but also for AMD.

Now, that the company has complete dominance in the gaming console market, it can use the synergies to build its position in PC gaming market as well, which is currently dominated by NVIDIA. The company claims that the PC is the way forward for the video gaming industry. NVIDIA also claimed that game developers are now paying more heed to PC gaming as 48% of the developers are working on PC game titles.

The PC gaming hardware market is expected to be worth more than $30 billion by 2015, according to a research report released by Jon Peddie Research. AMD is set to take a big share of the pie with its new “Unified Gaming Strategy,” wherein it would be working with game developers to make the games easily portable to PCs. In such case, NVIDIA may suffer as the upcoming games may not be optimized for its cards.

Bottom line

AMD has always played second fiddle to Intel. However, the company is now looking to develop newer revenue streams and the impact is expected to be visible on its stock price in the near future. While its gaming console win seems to be already factored into the market price, the long-term impact of the video gaming dominance is expected to provide a boost to the stock in the coming years.

Its new processor endeavors and microserver story also bid well for the stock price. The mainstream server market is currently dominated by Intel, which owns over 95% share of the segment. AMD has seen its revenue falling in the recent past and it expects to see the trend reversed as and when it starts shipping new microserver chips in 2014.

According to HP, microservers are expected to account for up to 15% share of the global server market, which roughly translates into $2 billion worth of market value. With its new chips, AMD is in the position to give tough competition to Intel and may command up to 40% of the market. This will translate into potentially a 15 to 20% increase in AMD’s revenue in 3 years, creating healthy upside to its stock price.

 


Raj S 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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