AMD: Here’s Why You Should Look Before You Leap

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

Chipmaker Advanced Micro Devices (NYSE: AMD), forever the underdog in front of the behemoth named Intel (NASDAQ: INTC), is once again making an effort to bolster its prospects by attempting to utilize a niche market segment, namely servers designed for very high-end data centers.

What’s important however, is the fact that it’s being backed by ARM Holdings (NASDAQ: ARMH), whose chips can be found in most major smartphones and tablets, including the Apple iPhone and iPad. So what is a typical ARM-designed chip associated with? The answer is high efficiency, yet low power consumption. That is a distinct advantage over optimal efficiency at the cost of high power consumption, something that’s typically associated with Intel-designed chips. At the same time, AMD is aware that these very chips Intel produces are found in around 95.5% of servers around the world, as per Mercury Research. AMD’s share of the server processor market is around a dismal 5%.

But this time, AMD seems to be playing its cards well, as it attempts a shift from the traditional x86 Intel-dominated scenario, providing a ‘low power, high efficiency' alternative to massive data centers run by companies such as Facebook, Amazon and Google. At the same time, the x86 based processor business is going to remain its ‘bread-and-butter’ division, while the newer range will help open up hitherto unexplored sections of the market. And companies with big data centers are sure to embrace the idea of a low power, cost-efficient processor-based solution.     

But, the big question is – is this really a smart move on AMD’s part or one that its forced to make, given the sagging PC markets? And then again, will this move indeed be a life saver, with the chips coming into the market as late as 2014? Let’s attempt to answer these fundamentals before taking a call on the stock.

Once you stop glossing over the immense potential of AMD after its product launch and come back to hard reality, the chips are really down for the company, thanks to spiraling PC sales and of course, the Intel factor. AMD’s sales and gross margins have taken a hit, current quarter predictions are disappointing, and cash is running out – what more do you want? No wonder then that Fitch and Moody’s have jointly cut down on their ratings of AMD, something truly alarming for potential investors.

Keeping this in mind, the attempt to discover newer market segments, although it may sound a bit desperate, is still probably the best move possible. Even if it manages to glean away a 10% market share from Intel in future, it will mean a lot for AMD and probably bolster the stock after taking a huge 59% hit over the past year.

But once you ponder on the time factor, AMD sure seems to be on slippery turf. In fact, some of the very companies, such as Dell and Hewlett Packard, that it may be targeting to market the new chips are themselves trying to build similar products or servers based on the ARM technology platform. And if you are only bothered about Intel, that doesn’t help much either. Although Intel probably will never make ARM-based chips mainly because they don’t want to shell out royalties to the latter, the company has ramped up its efforts to launch low-power chips by itself, and one such product may be out as early as the end of this year.

If that happens, the only distinguishing edge AMD might have over cash-rich Intel will be its own ‘Freedom Fabric’ – a technology that integrates a lot of servers as part of a cluster and a legacy of the SeaMicro acquisition. But then, the question remains – will the edge still remain till 2014? I think not. This is one stock I would be watching from a distance, just to see if it does rise from the ashes. Till now, the chances are really slim. Fool on!    

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subhadeeptech 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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