AMD Secures Lender of Last Resort: What's Next?

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

Liquidity issues don’t just happen to companies that have been losing money. Sometimes companies without a lot of cash with large amounts of debt can have liquidity issues during periods of low liquidity. Advanced Micro Devices (NYSE: AMD) did not get a cash infusion, but secured a hostage, or a lender of last resort depending on the level of intensity you like to inject into your life. One of AMD's institutional investors would have no choice but to basically bailout the company, if necessary, in order to lose their entire investment. That sounds like a hostage. Keep in mind there is always a choice.

The Hostage Crisis

Mubadala Investments increased its stake in AMD, this has led the market to conclude that it would come to the aid of AMD should liquidity issues arise. Even if that were true, I have not seen much in the way of plans going forward for AMD. I know that AMD has increased its server offerings with the SeaMicro acquisition, but what is it planning on doing with its consumer processors?

Even regarding SeaMicro I have not seen too much in the way of an ambitious plan or deals being closed. If AMD was going to be bailed out by an investor of last resort the subsequent shakeup might be too late. It could also be that financing is extended only to facilitate sale of the company or its assets. AMD needs to outline a bold plan for its future, or it needs to show that current initiatives are turning around or finally bringing in value.

SeaMicro to the Rescue, Maybe

AMD already had servers in its portfolio. SeaMicro might be the better technology, but apparently AMD wants to offer both products lines. I always like to see more focus unless the servers cater to extremely different markets. I know SeaMicro is for big server farms with its density and energy-efficiency. Targeting these mega data centers is a good move, but is there a reason to have two product lines, and will both bring immense value to the company? Considering its current issues I prefer that it focus its cash and effort on the best technology with the greatest potential profits and use the other one to aggressively chop expenses, by mothballing it.

SeaMicro's energy efficient, high-density servers are fantastic from what I have read so far. The servers are designed for the shift to even heavier cloud-based computing. Power and heat concerns are near the top of the list when determining what server to buy. Despite all this potential, I am not sure AMD is ready to really try and capitalize on that acquisition. This is mostly because the SeaMicro products page still discusses all the Intel (NASDAQ: INTC) products that are crammed into the server. It takes time to change the design to accept AMD processor. While I understand the technical considerations it does not change my perception that AMD does not seem ready to leverage their acquisition of SeaMicro.

Core Business Developing Weakness

Regarding regular processors there are a few issues. First, the PC market is lagging and growth is not likely to return quickly or in the magnitude that is necessary. Second, AMD continues to get trounced by Intel when it comes to these processors. AMD has always focused on the mid to low price range for consumers. The consumers who would have gone with AMD processors 10 years ago are now just getting tablets. The mid to low-end market is disappearing, and this directly impacts AMD. Perhaps it is time to call it quits. In the time it takes AMD to claim victory, assuming it can, the processor market is a shadow of its former self.

Even market leader Intel is feeling the pain so there is not much hope for the perennial laggard. Intel is not in a position of disappearing, but it needs to explore new revenue opportunities. It needs to get into the mobile market, even though Nvidia (NASDAQ: NVDA) and Qualcomm are so entrenched.

Even jumping into the mobile computing sector is a problem for AMD. When you are behind and strapped for cash you do not want to jump into a sector with well-entrenched rivals like Nvidia with its Tegra processors and Qualcomm. Intel is probably eyeing the mobile space as well, so AMD would have a herculean task.

AMD should focus on its GPU business, which is actually a quality product. I think GeForce products have gotten too much ground on Radeon ones. Games used to say powered by Radeon, but now it's always an Nvidia symbol when I start it up. Sure they are compatible with Radeon GPUs, but they are built around GeForce. However, Radeon graphics cards are fantastic, and if AMD can be good but cheaper it can make some serious headway. I sometimes feel that my GeForce cards are slightly overpriced for their potential, but I have been a GeForce fan even when ATI was its own company and was the leader in GPUs.

I think AMD can get further with its GPUs than with its processors for two reasons. First, Nvidia is not as far ahead of AMD in GPUs, as Intel is for CPUs. Second, the market for GPUs is not as sickly as the market for PCs. Computer users who need a high level of graphics capability will not be doing their work or playing their games on a tablet. With AMD's current troubles the path of least resistance is the path the company needs. Until I get an idea of what it is going to do with its new found breathing space, I am sidelined on this company, and if you can get out without too much damage I would do so until the picture is clear.

TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. 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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