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For AMD, Less Is More

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The problems Advanced Micro Devices  (NASDAQ: AMD  )  have faced lately are well-documented. Inventory writedowns, delivery problems, and macroeconomic pressures have all negatively affected AMD's share price. Down 53% year to date, AMD shareholders are ready for something to hold onto.

Strange as it sounds, the recent announcement from AMD that it has renegotiated its wafer contract with longtime partner GlobalFoundaries, agreeing to only one-quarter of the original contract, is a good thing. Under most circumstances, ordering such a small amount of inventory is viewed as an indication of a depressed marketplace, and a company that isn't meeting its revenue objectives. But for AMD, less turns out to be more.

The deal
Rather than the $500 million in wafers AMD had agreed to purchase, the new arrangement with GlobalFoundries calls for $125 million worth of product delivered in Q4. Here's where it gets kind of strange, however. The two companies agreed to the deal, with one large caveat -- AMD is required to pay GlobalFoundries a $320 million "termination fee."

There are a couple of downsides to the deal: No. 1, AMD ends up paying almost as much for not fulfilling its entire order than if it had done so. No. 2, AMD will incur a $165 million charge in the current quarter to account for the fee.

The upshots
One upside to the fee, if it can be called an upside, is AMD is able to spread the payments out over the course of the next year. Considering AMD's declining cash balance -- down nearly $300 million compared to the prior quarter's $1.58 billion -- and $2 billion debt load, ready cash is at a premium.

AMD's decision to sell and lease back its Austin, Texas headquarters, pocketing an estimated $150 to $200 million , is an example of the need to bolster its financial standing. Plans are to complete the transaction, and have the proceeds available to help pay operating costs, by Q2 of 2013.

The new lower volume of wafers means AMD should be in a better position to manage its inventory. So, the write-offs AMD's been forced to take in the past for unused product shouldn't be an issue, at least for the immediate future.

Going forward
To its credit, AMD is taking steps to broaden its markets beyond PCs. But its efforts to grow the mobile business means AMD is running headlong into the likes of Qualcomm  (NASDAQ: QCOM  ) , Ericsson  (NASDAQ: ERIC  ) , and NVIDIA  (NASDAQ: NVDA  ) , all of whom have been there, done that.

According to research firm IHS, both Qualcomm and NVIDIA will grow processor revenues in 2012. Qualcomm is expected to make the biggest jump, generating an additional 27.2% compared to last year, and NVIDIA will show an 8.7% improvement. The IHS study suggests AMD will see a decline in 2012 processor sales of 17.7%, thanks to the disintegrating PC market.

And then there's Ericsson and its smartphone patent portfolio. Its patents alone make Ericsson a key mobile chip player -- and another roadblock for AMD to overcome. Samsung, already paying Apple for infringing on its patents, is also the target of a recent patent infringement lawsuit filed by Ericsson.

Like AMD, Intel  (NASDAQ: INTC  ) is another big hitter that was late to the mobile computing wars, but even it's ahead of AMD. For investors looking for value in the mobile chip space, Intel's financials, along with its impressive 4.5% dividend, make it an attractive alternative.

With all that, based on readers' comments from my Dec. 5 article, AMD has a number of fans, both for its products and its chances of getting things turned around. Though not at its 52-week low, AMD's share price is meandering in that neighborhood, which equates to a decent risk/reward scenario for the more aggressive investor.

NVIDIA was ahead of the curve launching its mobile Tegra processor, but investing gains haven't followed as expected, with the company struggling to gain momentum in the smartphone market. The Motley Fool's brand-new premium report examines NVIDIA's stumbling blocks, but also homes in on opportunities that many investors are overlooking. We'll help you sort fact from fiction to determine whether NVIDIA is a buy at today's prices. Simply click here now to unlock your copy of this comprehensive report.

Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On December 07, 2012, at 8:40 PM, jhf678 wrote:

    AMD would save another 180 mil. Good for them after selling the real estate, they can focus more on developing a better chip than Intel and Nvidia.

  • Report this Comment On December 07, 2012, at 9:57 PM, rav55 wrote:

    AMD S10000 Firepro is better than both. Xeon Phi and nVidia Tesla.

    S10000 delivers 1.48 double precision Tflops and that makes it #1.

    AMD needs to work on their marketing.

  • Report this Comment On December 07, 2012, at 11:27 PM, TEBuddy wrote:

    And if you are not up to speed, AMDs highest volume chips are not even produced at GF. So they are increasing production at TSMC. They dropped GF products to focus on the TSMC ones. I wonder if AMD is making any 28nm stuff at GF, might as well have just jumped to 20nm. AMD payed for 28nm development, from lack of other customers, and GF has been causing the bleeding at AMD.

  • Report this Comment On December 08, 2012, at 7:03 AM, sisula wrote:

    As for S10000, does AMD bundle it with a personal power plant? ;-)

  • Report this Comment On December 10, 2012, at 12:25 PM, TEBuddy wrote:

    Hey sisula, the Nvidia GTX 590 for consumers draws 365 Watts in reference configuration, just imagine if someone overclocks it. AMD manages to destory that performance at about the same power draw. The MOST efficient GPU ever in terms of Performance per Watt.

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