4 Companies Pursuing the Right Course of Action
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Transitions are scary because there is no right thing to do. The company has to take a chance and see where it leads. That is even harder when a new path will take years to fully evaluate. Nothing will be gained if nothing is ventured. Making a judgment long before a plan fully plays itself out is how legends are made.
1. If you cannot compete, avoid the gladiator pit
I really like the path that Advanced Micro Devices (NYSE: AMD) is on. I am not 100% certain that it will work out, but I feel that its path gives it the best chance. The push into servers and the SeaMicro microservers is a good move. Servers are big business and microservers could become a welcome niche with that market.
If AMD can establish itself as a major supplier, then it could grab the lion's share of microserver revenue. Microservers could make up 10% of the global server market by shipments. AMD has about $5 billion in revenue, and the global server market in 4Q2012 was $14.6 billion, so there is a lot of potential
AMD processing chips and GPUs are going into the two major home consoles of the next generation. AMD is already in the Wii U. The next generation will be a bit more crowded with the Steam Box and Ouya, but the Playstation 4 and the Xbox 720 are the forefront of consoles for now.
PCs and notebooks are shrinking rapidly, and Intel (NASDAQ: INTC) is already the leader there. Margins are probably low for the consoles, but AMD is not in a position to care about how little profit it makes as long as it can make a profit. Consoles sell in the millions so the volume is there. AMD is not in a position to follow Intel into mobile, but the win with consoles as well as its expense-cutting might increase profits and drive the stock up from these depressed levels.
2. Become a god of the arena
AMD would have no hope competing against the current companies in the mobile space. Intel stands a chance because it is Intel. Despite entrenched and strong competition like Qualcomm, Intel really stands with little choice but to try for mobile. This is its move.
Intel seems to be seeing some success in mobile, but I would like to see them win a place in some major designs. Perhaps it will strike a deal with Apple, which would be a great start. Intel needs mobile revenue to exceed the decline in PCs and notebooks so that it can return to top line growth.
I cannot emphasize enough that this is what Intel has to do. It has a good chance of success, but how much success is very much up in the air. News regarding a win from Apple might send the stock higher, but it will take time to evaluate the effect on fundamentals and whether it is enough to sustain growth.
3. The hub not the end of the spokes
I think hybrid drives are a great move for Seagate (NASDAQ: STX). Mobile and notebook hard drives will not be as important as cloud storage. Also, solid-state drives have their drawbacks. They are expensive and have a lot less capacity for now. Hybrid drives boost access speeds but allow for more storage. Considering the cost and capacity limitations, I think that Seagate is making the smarter choice for now. The cloud is where it is at.
As for the consumer division, everyone loves solid-state drives for their quick loading on boot, but the drives cost a lot for any real capacity. Notebooks suffer enough compared to tablets, and if they get more expensive, then what would be the point. Cost and capacity might explain why the Playstation 4 will not have a solid-state drive.
Spending on cloud infrastructure is going to grow in order to handle all the devices and services that are coming. Take the example of the next console generation that has a lot of online functionality for both delivery of games and playing online. I think hybrid drives split the difference on speed while offering better prices and more storage. Not everything needs fast access for top dollar.
4. Plant money trees
Adobe Systems (NASDAQ: ADBE) is switching to a subscription-based model, and this is something else that I see little choice in. Adobe needs to move to a subscription model of the kind most other companies use. The company is aiming for 1.25 million subscribers by the end of 2013. I saw mention that they crossed the half a million mark, and have two million free trial users. The company is going to start reporting a lot of deferred revenue, which might actually lower total revenue for a few quarters.
I think it could meet its target subscribers, and an announcement to that affect before the end of 2013 could drive the stock up. Being primarily a software business, the costs from having a million subscribers versus two million are small compared to the overall gains. Those gains are also recurring with yearly renewals. The subscription-model could be a major driver of revenue going forward.
But what about the stock?
AMD is by far the most beaten up company on this list. It is posting losses. I think its current strategy is the one most likely to allow the company to turn itself around. I still want to grab some $7 calls for 2015, as long as they are very cheap.
Intel's stock has been flat on its outlook and its core business is shrinking. Entering mobile will not be easy, but Intel is a big enough player that it can grab market share. Seagate has a P/E below 5, and I like the path it is pursuing with its products. I do not think it will stay so low, but I think a P/E of 8 is reasonable with increasing share price, not declining earnings. Adobe is actually up nicely over the last couple of months, but there will be more upside for the company if it can meet its subscriber targets.
Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems and 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!