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Advanced Micro Devices (NYSE: AMD ) is a mystery wrapped in an enigma. The eternal underdog in the x86 processor space placed a big bet on graphics-infused central processors six years ago. In another game-changing move, AMD punted on its chip-manufacturing operations, now known as GlobalFoundries. Along the way, the company turned years of glitchy operations into a reliable and profitable business -- and then bid farewell to the CEO that made it all happen. This erratic flight path has attracted plenty of critics, and more than 12% of AMD's float was sold short at the end of January.
But the fog is lifting, a little bit at a time. AMD's analyst day painted up a bold roadmap, designed to squeeze value out of that old ATI deal and keep AMD relevant no matter where the chip industry goes next. Fellow Fool Evan Niu is intrigued by management's newfound openness to designing processors around ARM Holdings (Nasdaq: ARMH ) or MIPS Technologies (Nasdaq: MIPS ) architectures.
So I jumped on the opportunity for an interview with CFO and former interim CEO Thomas Seifert to clear up a few of the more pressing questions around AMD.
First things first -- are you married to x86?
On the possibility of moving away from the Intel (Nasdaq: INTC ) compatible x86 world, Seifert explained that it's all about making the chips as flexible as possible: "It's not so much about ARM or not ARM," he said, "but more a question of having a flexible architecture that allows us to integrate third-party IP. You know we're interested to monetize and make the best use of our IP. But we have to be flexible to incorporate IP just to make sure that we can react to the needs of our customers."
And that's actually a two-way street. Not only is AMD open to incorporating unfamiliar chip designs into its own products, but the company might even license out some of its own intellectual property to other chipmakers. AMD could become the x86 equivalent of ARM or MIPS, in other words. Or maybe the rich trove of graphics innovation at AMD's disposal could become a licensing goldmine. It all depends on who comes knocking, and what they might be looking for.
Patent licensing is a very profitable business model. Both ARM and MIPS enjoy gross margins north of 90%, for example. And margin leverage is an important part of AMD's current strategy. "We have line of sight to gross margins of about 50%, and just delivering on what we promised [at the Analyst Day] in terms of product roadmap and market segments is going to help," Seifert said.
Chiefly, that means increasing market shares in the high-margin notebook and server segments at the expense of market leader Intel. It's not a question of ramping up economies of scale, but of selling a more profitable chip mix. "Having a significantly larger share in the server segment would help, because traditionally, the profitability and gross margins in server products are significantly higher than in the other segments we play in," Seifert said. "The embedded business also has a higher gross margin. It's not so much about economies of scale -- more about growing in the right market segments."
And while we were on the topic of diversity, AMD turns out to be less tightly married to GlobalFoundries than I had thought. AMD has long used Taiwan Semiconductor Manufacturing (NYSE: TSM ) to make graphics processors, but that relationship has already expanded into system processors. Seifert noted that AMD's Brazos line of low-power notebook processors ships out of TSMC's factories today. Somehow, I missed that announcement. Spreading your eggs across more baskets seems like a terrific idea, especially when you consider localized disasters like last year's flooding in Thailand.
The Foolish takeaway
Through most of 2011, AMD's picture was way too cloudy for any sort of thumbs-up recommendation. With fresh clarity in these burning questions, I'm comfortable with a bullish CAPScall on AMD again. Analyst firm Bernstein would agree, having just raised AMD to a buy because the risk/reward equation is "skewed positively" once again. See what a little transparency can do?
AMD is attacking the mobile market from a very unusual angle, choosing to focus more on tablets and ultrathin notebooks and less on the crowded smartphone space. If you're interested in a more conventional but no less exciting mobile chip stock, you should read up on the mobile trillion-dollar revolution and how some of AMD's rivals are jumping in with both feet. That's a special report, free to Fools for a limited time, so get your copy right now.