Why AMD Really Needs Some Money

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

Cash does seem to be the most valuable thing to possess at the moment for Advanced Micro Devices (NYSE: AMD), always a distant runner-up to chip goliath Intel (NASDAQ: INTC). And the desperation is showing in a dismal pc market as the company slashes its processed semiconductor wafer orders from manufacturing supplier Globalfoundries Inc. in a bid to save costs. The question remains that with AMD paying through its nose in terms of the termination fee involved ($320 million), is this really a smart move, or one that is unlikely to save the sinking ship? Add to it the $165 million one-time charge involved that will hit the company in the fourth quarter, and it becomes obvious that AMD is in a real pickle at the moment.

In any case, such a move is something that seems to be a wise thing to do in the short term, given the fact that company sales are all set to nosedive in the fourth quarter, highlighting the urgent requirement for healthier cash reserves. What’s also good is that the company has made plans to lease or sell its Austin-based facilities, which it hopes should bring in a cool $150 million to $200 million.

Everybody interested in the world of technology should have a fair idea of the PC industry slump by now, but just for the uninitiated, here’s a list of what went wrong for the desktop biggies. With macroeconomic headwinds threatening the overall industry prospects, Apple’s iPad and Google’s Android-based smartphones and tablets have together spelled doom for the global PC markets. That’s evident in IDC’s prediction of a measly 0.9% growth in the worldwide PC market in 2012. What’s bad for companies like AMD and Intel is that the PC semiconductor pros have also been hit hard.

While it’s true that everybody, including AMD, are doing the best they can by shifting focus to handheld devices, that space is already crowded by now. Companies like Qualcomm (NASDAQ: QCOM) and NVIDIA (NASDAQ: NVDA) have already had a headstart in supplying chips to smartphone and tablet manufacturers. AMD has been rather slow to start. As research firm IHS has predicted, at a time when Qualcomm and NVIDIA are set to grow processor-based revenues by around 27% and 9%, respectively, in 2012, AMD’s revenue will actually go down by 17.7%. That’s what happens when you are overwhelmingly dependent on the PC industry. The only silver lining is that if AMD plays its cards well, it can significantly narrow down its distance with NVIDIA with regards to GPU’s.

Then again, any story about AMD is incomplete without a mention of arch rival Intel. So let’s do a quick measure up of the current situation. The basic foundation remains the same – Intel’s chips can be located in around 95.5% servers worldwide, while AMD makes up for the minuscule remaining 5%, according to Mercury Research. While both companies have faced eroding profits and margins due to the PC industry’s woes, AMD’s cash reserves are no match for Intel’s financial clout. Intel chips have always been the product of choice for high-end customers, while AMD has always catered to the lower and mid-level segments. But now, as I mentioned in my previous blog on the company, AMD finally seems to have woken up and is targeting companies like Facebook and Google that depend on very high-end servers. And it’s teaming up with handheld device chip giant ARM Holdings to make more energy-efficient chips that consume less power, an area that’s considered the achilles’ heel for Intel.

There’s no dearth of efforts on AMD’s part and all is not lost for the troubled company. Slimming down its requirements from Globalfoundries will certainly help AMD manage its inventory better. At the same time, the Austin facilities deal should bolster its cash reserves a bit more. AMD is also increasingly shifting focus to other suppliers such as Taiwan Semiconductor Manufacturing Company (TSMC), a move which will be effective in countering NVIDIA’s GPU-based dominance. What remains to be seen is how the company fares over the next two quarters, which may be the ‘do-or-die’ factor for AMD, and starts generating cash from operations once again. Till then, fool on!

subhadeeptech has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel and NVIDIA. 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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