Why You Shouldn’t Let Go Of This Stock Yet

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

The recent fourth quarter results declared by chip-maker Advanced Micro Devices (NYSE: AMD) only serves as a grim overall reminder of the perils of depending on a fading PC industry. It has brought down behemoths like Intel (NASDAQ: INTC), with a commanding 96% chip-based presence in the planet’s computers, and now threatens to tumble smaller rival AMD with its meager 4% share. And as usual, the small guy here takes a bigger hit. If Intel has predicted a 6% fall in q-o-q revenues in the current quarter, AMD’s guidance is even worse at a 9% q-o-q fall. But, like light at the end of the tunnel, the enterprise server segment, with its newly-founded dependence on the cloud, seems to have prevented a complete washout for both. In the process, it has actually helped AMD, as the company’s revenues did not fall to the extent analysts had expected.

Enter PC-killers smartphones and tablets. By now, everyone who’s interested in the processor manufacturing industry knows that as Intel and AMD bid farewell to PC-chip based revenues, they are aggressively turning towards newer revenue streams in the shape of chips designed for smartphones and tablets. However, what distinguishes the two and puts AMD at a disadvantage is the word ‘cash’. Intel has got truckloads of it, and that gives it the guts to invest even more in plants and equipment as it adapts to a post-PC world. AMD, on the other hand, faces a further decline in its perilously low cash reserves in the current quarter.

So, is there really a way in which AMD can have an edge over Chipzilla? Thankfully, yes - the ARM Holdings (NASDAQ: ARMH) factor, as I had already mentioned in an earlier blog. ARM-designed chips are traditionally associated with low power and high efficiency, something which Intel finds tough to beat with its ‘high efficiency, more power’ image! After all, that’s what makes ARM-designed chips readily acceptable to an overwhelming majority of companies, including Qualcomm and NVIDIA, manufacturing chips meant for mobile products. ARM is sure to give a ready-made advantage to AMD, while Intel huffs and puffs over its attempts to design more low power chips on one hand, and maintain demand for the chips coming out of its expensive fabs.

Coming back to the cash factor, I still don’t see any major cause for worry. Given the employee layoffs and renegotiated agreement with its supplier Globalfoundries, I’d say AMD is doing the best it can to reign in cash under the current circumstances. The renewed agreement with Globalfoundries will enable AMD to place reduced orders for ‘processed semiconductor wafers’ and thus save money in the long run. And let’s not forget the company’s Austin-based facilities deal, which should bring in another around $200 million. Keeping this in mind, I would not be very worried about the erosion in AMD’s profits, out of which $273 million can be attributed to expenses related to the change. After all, AMD already knows about the mega termination fee it’ll have to pay Globalfoundries, and this is all a part of that.

As I said, AMD’s doing whatever it takes, and they seem to be doing the right things too. After gunning for innovation in the name of cost-cutting, the company finally seems to have got wiser and hired some top-level engineers, primarily aimed at ramping up its SoC (System on a Chip) based efforts to target the phone and tablet industries even more. Upcoming low power products like Temash and other processors aimed at Microsoft’s Windows 8-based products also serve as an early pointer to its continued efforts in this direction. This company can make it through if it manages to successfully juggle the abilities to control cash on one hand, and quicken its pace of adaption to the mobile world on the other. Don’t let go of AMD yet--it does have the potential to reward your patience. Fool on!     

subhadeeptech has no position in any stocks mentioned. The Motley Fool recommends Intel. 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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