A Potential Positive For AMD

Advanced Micro Devices (NYSE: AMD  ) has been hit pretty hard as the PC market, which still comprises the majority of the company's revenue, has been in decline over the last several years. The advent of thin and light, yet inexpensive tablets with great battery life has been particularly negative for AMD, which is highly levered to the lower end of the PC market.

With that in mind, it's interesting to note that Digitimes, a leading Taiwanese news outfit, reports that Taiwan Semiconductor is seeing an increase in orders with short lead times from its PC-levered customers. While it is still too soon to tell, if the PC market really does rebound then this could be a boon for AMD -- competitive issues and all.

AMD's competitive position isn't great
AMD's competitive position against chief rival Intel (NASDAQ: INTC  ) in the PC market hasn't been stellar. In terms of power efficiency and CPU performance, AMD's products have been clear laggards compared to their Intel counterparts.

Further, since Intel is on a more sophisticated manufacturing process, it is able to pack in more performance and keep a cost lead. This is why AMD struggles to maintain gross margins just south of 40%, while Intel enjoys gross margins in the 60% range.

Further, while Intel has historically neglected the low end of the PC space, where AMD's parts have traditionally been superior, it has signaled its intent to drive more aggressively into this market. In an environment of continued PC weakness, this would be extraordinarily negative for AMD and at best neutral for Intel.

Secular trends could be an offset
In a declining market, AMD would likely significantly underperform the broader PC market, as Intel would be much more aggressive about low-end share. But what about a market that has stabilized and is showing signs of a return to growth, even modest growth? In such an environment, while competitive concerns would remain, they would perhaps be dulled by positive secular trends.

In an environment where the PC is stable and AMD's PC revenues don't decline as badly as expected, its other businesses -- namely the semi-custom business -- would start to actually drive growth, rather than simply serve to try to offset a weak core business. This would fundamentally change the AMD investment thesis and make it much more attractive at these levels.

Foolish bottom line
AMD is still incredibly speculative. Management is trying to downplay the PC market, since it's declining and AMD's competitive position isn't great. But it is much more material to the investment thesis than crowded ARM servers or low-margin game-console wins.

If the PC market begins to show real signs of a recovery and a return to growth -- and if AMD's competitive position doesn't further deteriorate, another big unknown -- then the shares could be attractive. Until then, though, there are better semiconductor plays.

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  • Report this Comment On January 01, 2014, at 10:13 AM, bluesky64 wrote:

    Ashraf,

    Here's how it look at it.

    Why you want to buy and Hold AMD right now!

    AMD has so much upside going on for 2014 you would be a fool not to see it.

    1. Q3 revenue grew over $300 million returning AMD to a profit.

    2. $1.2 billion in cash.

    3. Secured line of credit of $500 million.

    4. AMD has successfully reduced operating expenses

    5. They are producing profits even when PC chip sales decline.

    6. They are meeting a $400 million wafer supply agreement with Global Foundries.

    7. AMD landed long term contracts with Sony, Microsoft & Nintendo .

    8. Sony reported over 1 million units sold within the 1st 24 hours of release of their PS4 WAY more by now!

    9. Microsoft reported over 1 million units sold of XBOX1 within the first 24 hours, and by now way more.

    10. Both PS4 and XBOX1 are selling out in stores as fast as the stores restock them.

    11. The new AMD R9 series cards are selling out as fast as stores can get them. (This is revenue analyst have not considered or expected.)

    12. The New AMD R9 cards are specifically tweaked for many popular games.

    13. AMD GPU’s are and will be in great demand for a long time with BITCON and LITECON miners.

    14. Nintendo has popular games released for the Wii U and console sales are increasing.

    15. China is now able to buy PS4 and XBOX1 sales and pre orders going through the roof. And another variable that the analyst have not or did not consider!

    16. Mantel will allow the game makers to make games that will cross platforms. This is a Biggy!

    17. Most all of the new games will be using the AMD created MANTLE API.

    18. Gamers will longer need to purchase high end Intel CPUs, to get superior gaming.

    19. Gamers will need AMD graphics to get superior graphics with MANTLE API, will allow AMD to take market share from Intel and Nvidia in the PC gaming area and will have the corner on the market in this.

    20. Gamers will be able to use less costly AMD CPUs, and be able to get great performance from AMD graphics.

    21. MANTLE will greatly reduce sales in this next year to INTEL, and more revenue will go to AMD. This is already happening. Many are jumping ship from Nvidia to AMD PC graphic cards because of mantel, games being tuned for AMD, and cross platform compatibility (Porting) between consoles and PC’s. (Heck there sold out!)

    AMD server market is growing:

    1. Verizon is deploying SeaMicro SM15000 servers. With AMD inside!

    2. HP working with AMD for their HP ProLiant servers.

    3. HP ProLiant and AMD solutions powered by AMD OpteronTM processors

    4. IBM System x™ servers powered by AMD eight or twelve-core Opteron 6000-series processors.

    5. And roomers of other big companies that are going with AMD for their servers.

    New Semi-Custom business:

    Semi-custom and embedded businesses become consistent free cash flow, because most of the costs are upfront and partially covered by their partners/customers.

    Q3 was the first quarter of the ramp; it is very possible that the margin from the console chips is 20% or more. An additional 5% margin on $2.6 billion equals an additional $130 million of profit.

    AMD has several new products coming out:

    1. Kabini APU. USE LESS POWER AND FASTER plus costs less than the competition.

    2. The only X86 architecture bridged with ARM.

    3. HSA. WILL REVOLUTIONIZE THE PC market. Intel and Nvidia don’t have it!

    4. And new GPU’s that are in great demand

  • Report this Comment On January 01, 2014, at 10:56 AM, SnarfJabroni wrote:

    @bluesky64

    Cool story bro....AMD fanboi much?

    If your investing thesis for AMD is they have a billion in the bank, a $500M credit line, and are in PS4 and XBOX...you are going to be sorely disappointed I'm afraid.

    AMD has had negative retained earnings and net tangible assets for MANY years now...they are merely a dead man walking chip design house with a market cap of less than HALF of what they paid for ATI several years back.

  • Report this Comment On January 01, 2014, at 11:24 AM, masterwallstreet wrote:

    IN my opinion only, professional analysts and professional opinions are now starting to change their tune. They are not coming out and admitting that they are completely wrong about their opinions. They try to sugarcoat it. They now say there might be a possibility and they might have been wrong overplayed over shorted doesn't look as bad as before market is stable. There is also possibility of a turnaround. I guess they do not want to look completely incompetent. The damage is all done already. What happens to the 127 million shares that have to cover in less than 5 days. The conference call will be on January 6. It is available on their website and it will reveal new cutting edge products and maybe one or two surprises news. They will release pre-earnings announcement for fourth quarter. Earnings day is the 21. This will be one great month for AMD and a great year. I guess that they are a little too late damage is done

  • Report this Comment On January 01, 2014, at 11:47 AM, smallormidcapman wrote:

    You continue to miss the most important catalysts moving this stock.

    1. APUs as they move up the PC food chain taking share from Nvidia discrete and Intel integrated.

    2. Custom APUs as they transform the console industry, enter the lucrative embedded space, and transform servers (x86 and ARM).

    3. HSA and Mantle will set the bar for how games and other applications can leverage AMD hardware to clearly surpass Intel and Nvidia.

    4. Dense ARM servers with SeaMicro ip. First Verizon...then Amazon? Google? Facebook? They all want ONE thing...CUSTOM ARM SOLUTIONS. AMD is the best at custom...20+ years experience in servers...PROVEN custom APUs...no brainer for them.

    5. The ability to be the ONLY custom server shop with x86 and ARM...CUSTOM is where it's at...AMD has a CLEAR advantage. Some customers wants x86...some want ARM...some may want a mix. ONLY AMD can do both.

    6. A clear shift in the PC market per Gartner, IDC, and your cited Digitimes source. AMD guided "down 10%" but it is much better than that. Each point less bad will be huge...even at a 15% market share.

    7. 127,000,000 shares short is rocket fuel...

  • Report this Comment On January 01, 2014, at 12:36 PM, allansainz wrote:

    To Ashraf

    The only problem i have with ANY of your articles in the Semiconductor is that you continuously PUMP Intel and INVIDIA and CONTINUOUSLY bash AMD.

    with that being said .While writing articles for AMD you continuously lean on the PC with AMD. now here is the thing leaving aside the gaming sector which we all know is booming for AMD,leaving out Seamicro which we all know is beginning to BOOM with the VERIZON,HP and IBM deals and GOOGLE a speculative future play as well as amazon and facebook.leaving out the GPUs wich are BOOMING and selling out everywhere ,some say the mining BOOM some say they would have sold regardless,leaving out APPLE contract with AMD GPUs.with all that being said and leaving all that aside lets talt about AMD and PC.in this article you stated AMD CEO's have "DOWNPLAYED the PC" now i recall AMD CEO's being the only ones that have OPENLY stated the PC decline as they did in the last earnings,while INTEL said the PC is Stabilizing.now with that being said in the PC sector,you pump INTEL a lot making it seem as if INTEL has no competition of its own.sure INTEL is trying to attack the low end PC but AMD is reolutionizing how PC's talk with HASA,HUMa and APUs.you seem stuck in the old days of HORSE POWER and fail to see that moorse law is hit a WALL as most journalist have stated countless times,so AMD took the initiative and found a way to IMPRIVE GRAPHICS with less CPU power.MANTLE AND HASA,HUMA.this is what you fail to see,AMD is not trying to compete with INTEL by who has the bigger...you know..much rather WHO UTILIZES IT BETTER. and AMD has come out on top.you fail to see that these HUGE companies have chhoosen AMD.regardless of how you play it,they see what you fail to see..the future of technology,that its no longer about raw power BUT INNOVATION to DO MORE WITH LESS CPU POWER,TO HAVE BETTER GRAPHICS TO MAKE SIFY a REALITY.and for all that ..you need graphics,memory,harmony with every component.now moving on to INTEL your PUMPER HOME, INTEL revenue comes mainly from CPU and server.CPU declining as you put it is really bad for INTEL.really really bad,in the server spectrum,sure intel has over 95% market share...a few months ago..AMD and many others are begining to attackl that sector,AMD being choosen by verizon was no small feat..it was huge!you will claim it was because of pricing,sure,but its also because of supirior product!on ly a fool thinks VERIZON the biggst PROVIDER IN MOBIL DATA WILL BUY A SERVER PROBIDER JUST BECAUSE ITS CHEAP!!they when with AMD because THEY OFFER A CUSTOM DESIGN THAT WOULD BE SUPIRRIOR TO ANYTHING OFF THE SHELF.and that goes for anything AMD is outting out right now,VERIZON AND APPLE AND H AND IBM think differnet than you,and would much rather listen to the smarted men in buisness than a FOOL who ONLY TALKS ABOUT TRASH on AMD.KEEP PUMPING INTEL, it will TANK SOON!

  • Report this Comment On January 01, 2014, at 4:25 PM, KenLuskin wrote:

    Ashraf,

    Of course you FAILED to comment on this data point from CONTEXT:

    AMD Notebook sales up +10% through Western European Distribution in early Q4 2013.

    In In a notebook market down by -12% year-to year for the period, AMD-powered laptops saw their share increase from 14% in early Q412 to 18% for the equivalent period of 2013.

    How does this NEWS and FACT fit into your thesis?

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