Has this Semiconductor Company Bottomed?

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

The decline in PC sales has severely impacted the OEM (Original Equipment Manufacturers) and PC semiconductor companies. The handheld devices are quickly taking over the PC market but that doesn’t mean the PC will die any time soon. This only means that the sales of new PC devices will lag behind tablet/handheld sales and companies relying totally on PC will see negative growth. In the stock market where valuations are tied to growth, this is as good as dead gets.

The PC semiconductor companies have suffered a lot due to this decline and adverse outlook of PC. Once a semiconductor giant, Advanced Micro Devices (NYSE: AMD) has lost almost 70% of its value in the last year and investors have a bad perception of the company going forward. I believe at these levels AMD has already hit the bottom, especially if take into account the strong position of the company in the gaming console industry.

Industry Outlook

The entire PC industry was relying on the latest operating system by Microsoft (NASDAQ: MSFT), the Windows 8. This was the first touch based operating system from the tech giant and was meant to reduce the migration of tablet devices, by its OEM partners, to the rival Android. The sales data from most OEM suggests that Windows 8 has failed get the traction the market was expecting. Microsoft was hoping that Windows 8 would be able to increase consumer interest in hybrid devices such as the Surface RT and Surface Pro and others by its OEM partners. 

Advances Micro Devices

In this troubled industry AMD has suffered the greatest due to falling demand for its PC hardware. The company sales have fallen almost 70% in the last year alone and the stock price has also suffered. The stock slid to below $2 a few months back but has somewhat recovered since then. The company has lost almost 70% of its value in the last year alone  due to a worsening outlook of the industry and its inability adapt to changing sector trends. AMD has largely been unable to diversify away its revenues from the PC segment, something its competitors have done to somewhat reasonable affect. 

The company has taken a number of steps to slow down the rampant deterioration of shareholder wealth. It has recently won two major contracts for its semi-customized chip fromthe two largest players (besides Xbox) in the console industry i.e. Sony and Nintendo.

Nintendo will use AMDs graphics processor while Sony’s new PS4 console will carry AMD’s 8-core Jaguar. There are speculation that semiconductor company will include Xbox to its console customer list which will make the company a major player in the substantial console market. The new model of the Xbox might run on the Fusion SoC with eight x86 low-power/low-cost Jaguar cores. This could be a major development for AMD because upgrades in the console industry are not as frequent as the PC or smartphone industries and a console can run for as long as five years. This would mean a constant stream of revenue for AMD and better valuations for the investors. 

Competition

The market leader Intel (NASDAQ: INTC) has been able to accomplish this much more successfully. The company is focusing on providing low powered processors for smartphone devices. Intel is specifically targeting the low and medium range smartphone market which has a much higher growth potential as compared to high end products along. The smartphones in this segment are in high demand in Asia and South American markets, which have the best growth prospects as-well. Along with its smartphone ambitions Intel is focusing on further developing its enterprise segment which is still a high growth segment despite the PC decline.

Bottom line

AMD’s has slid continuously in the last year due to bad news from the PC industry. However, I believe the stock has bottomed out and there is little room for further deterioration. The stock is currently trading at an 11% discount to mean sell side target price. The company is trying to increase its presence in the consoles industry and any formal announcement of AMD in the new Xbox can be a major catalyst for the stock.


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