AMD's Troubles Will Continue in 2014

Although shares of Advanced Micro Devices (NYSE: AMD  ) rose in 2013, they did so only after the stock lost 75% of its value in the previous year. The troubled company has seen its revenue and profit decline. A shrinking PC market and continued share losses to Intel (NASDAQ: INTC  ) in the server market have taken a serious toll, and its graphics business is in a perpetual state of being one step behind NVIDIA (NASDAQ: NVDA  ) . While revenue from the game consoles will help AMD's top line in 2014, some serious problems need to be fixed.

Game consoles may lead to greater things
One bright spot for AMD in 2013 was its sweep of the major game consoles. Both the Xbox One and the PlayStation 4 are powered by custom AMD parts, and it's been estimated that the company receives around $100 per console sold. If the current generation matches the previous generation in terms of sales, a significant part of AMD's total revenue could come from these game consoles in the coming years.

These types of contracts, where AMD designs semi-custom chips for specific customers, are part of AMD's long-term strategy, and it should lessen the impact of the declining PC market. The upside to the game console wins is that revenue is essentially guaranteed for many years, assuming the PS4 and Xbox One continue to sell well. The downside is that margins tend to be low, so it will take a significant amount of additional revenue to make up for falling PC chip sales.

Given the resource gap between AMD and Intel, these semi-custom deals look like the best way for AMD to attempt to return to consistent profitability. AMD's biggest challenge in 2014 will be parlaying the console design wins into other deals and proving that its semi-custom business is not just a one-hit wonder.

Spread too thin
While these semi-custom deals are a good idea, AMD has a lack of focus that will simply not work for a resource-constrained company. AMD sells desktop chips, is trying to push its mobile chips with new launches next year, sells x86 server chips while planning the release of ARM-based server chips in 2014, builds semi-custom chips for game consoles, and sells graphics cards through ATI. The company is trying to compete with Intel and NVIDIA on all fronts, a strategy that is destined to fail.

AMD has spent about $1.2 billion in the TTM period on research and development, a number which has been falling for the past five years. Intel, on the other hand, has doubled its research and development spending since 2008 to $10.4 billion per year, nearly twice AMD's annual revenue. Couple that with Intel's huge manufacturing advantage -- with AMD still utilizing a 28nm process as Intel is pushing toward 14nm next year -- and there's simply no way that AMD can catch its rival. In the desktop and high-end server markets, Intel is untouchable. And in the mobile market, where energy efficiency is extremely important, Intel's manufacturing edge should keep it one step ahead of AMD.

AMD does have the opportunity to grab a bigger share of the microserver market with its upcoming ARM-based server chips; applications that work best with a large number of low-power cores are good match for the ARM architecture. However, Intel offers low-power Atom server chips aimed at this purpose, with Intel's manufacturing edge giving the company a huge advantage. It won't be easy getting companies to opt for ARM-based chips.

On the graphics side of things, AMD competes with NVIDIA, a company focused solely on graphics. While AMD's most recent graphics cards have been a success, causing NVIDIA to lower its prices in order to compete, the fact that NVIDIA was able to have such elevated prices for so long is a sign that AMD is having trouble keeping up. Early in 2014 NVIDIA will launch a refresh of its line of GPUs, built on a new architecture called Maxwell, which promises to be 3-4 times more powerful per watt than its predecessor. AMD will likely have no answer to this for quite some time.

The bottom line
AMD's strategy of competing in all markets simply isn't working, and the company needs to focus on fewer areas instead of trying to best both Intel and NVIDIA on multiple fronts. Intel has an edge in manufacturing and research that at this point is insurmountable, and NVIDIA's sole focus on graphics keeps the company one step ahead of AMD. The semi-custom deals are a good development, but AMD hasn't yet proven that deals beyond the game consoles can create meaningful revenue. There's still hope for AMD, but the company needs to use 2014 to refocus its efforts.

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Read/Post Comments (19) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On January 02, 2014, at 10:29 AM, bluesky64 wrote:

    Cramer and other analyst have upgraded AMD in the last couple of day. We see value and growth in AMD turnaround story.Here's an over view of AMD and why to buy. Revenue and Stock price for 2014. Next big catalyst CES Jan 6 4pm AMD will have a confrance call highlighting AMD show case.

    AMD 2014 Sales (revenue) Projection

    Consoles: 20M *$100 each = $2.0 B margin = 17%

    Ongoing desktops: = $1.3 B margin = 17%

    Ongoing laptops with APU support = $1.7 B margin = 35%

    SeaMicro vintage servers = $0.4 B margin = 45%

    ARM based servers = $0.6 B margin = 55%

    Radeon GPU systems = $1.0 B margin = 55%

    MacPro GPUs = $0.6 B margin = 55%

    Misc = $0.5 B margin = 35%

    Total = = $8.1 B total revenue. with $$550M profit or about $0.82/share

    AMD Dec 31 2013 $ 3.83, Jan 6 4pm $ 4.07 Jan 19 2014 $ 4.18, Earning call Jan 22 2014 $ 4.75. Feb 18 2014 $ 5.25, Dec 31 2014 $ 10.75 ( 300% gainer for 2014 )

    AMD will be strong over the next 3-4 years; will close 2014 at $ 10.75 share, will close 2015 at $20.00 /sh

  • Report this Comment On January 02, 2014, at 10:51 AM, KenLuskin wrote:

    AMD is FOCUSING!!

    But, the author is NOT informed.....

    AMD is NOT focusing on competing with Intel!!!

    But, the author is NOT educated enough to understand!

    AMD is FOCUSED on

    1) GRAPHICS

    2) INTEGRATED GRAPHICS

    3) Micro Server and lower power ARM 64 bit server chips.

    1) AMD is already the leader in INTEGRATED GRAPHICS, which is why Sony and MSFT both chose a semi-custom APU for their respective consoles.

    2) Within a few months it will be abundantly clear that AMD is the new market share leader in DISCRETE GRAPHICS.

    3) AMD management showed foresight by purchasing SeaMicro in 2012, because they are the leader in what is known as DENSE or MICRO SERVERS.

    The micro server approach is completely different from the server approach that has allowed Intel to take a 95% market share.

    NOBODY has more server IP than AMD as it relates to MICRO SERVERS.

    AMD invented the server chip architecture AMD 64 that is now used and LICENSED by Intel.

    Cloud providers will be purchasing at least 50% of the servers within a few years, and AMD will dominate in providing them with Micro Servers!

  • Report this Comment On January 02, 2014, at 11:01 AM, rustianowski wrote:

    This Author is not in touch with the gaming or pc market whatsoever. Having AMD CPU's and GPU's in one base rather than separate like nvidia and intel means you can work on more methods on how they communicate and collablorate on programs.

    This has led to the upcoming Mantle changes which will increase performance on an already price friendly GPU. Applications are also moving towards multicore/threaded applications which AMD excels at currently. The way people game has also changed, many gamers are using Streaming software, VOIPS, and media programs on multiple monitors. AMD has a grip on this multitask performance.

    I think worldwide everyone is starting to realize, it is not worth the money to purchase Nvidia, and sometimes intel desktop equipment at this point.

    AMD has also diversified better than other companies, I think unlike Intel and Nvidia, AMD knows its audience and it is catering to them.

  • Report this Comment On January 02, 2014, at 11:13 AM, bluesky64 wrote:

    Just out more proof what AMD is focusing on and doing the best.

    China's Micro Computer Magazine awards AMD best Product and best Technology of 2013;

  • Report this Comment On January 02, 2014, at 11:27 AM, cfhd wrote:

    "Timothy Green owns shares of Nvidia. The Motley Fool recommends Intel and Nvidia. The Motley Fool owns shares of Intel."

    Hmm with that information at hand I'm so surprised that the author and this website is trying to put doubt in peoples minds about AMD.

    AMD is on the up and up right now and will continue to rise in the oncoming years.

    You can't even compare last generation game console sales with this one. This new generation is going to sell so many more consoles than last gen its not even funny.

    Aside from that the GPU market for AMD is looking really good. Their cards are literally sold out all across the US right now due to them being 10 times better than Nvidia at mining crypto currency.

    If the author and the owners of this site had any brains they would be buying into AMD right now while its still in the single digits cause its going to fly up in the next few years.

  • Report this Comment On January 02, 2014, at 11:30 AM, kjurden wrote:

    It's obvious that INTC/NVDA are nervious over AMD's turnaround. Even as these negative articles are written the investors are continuing to BUY AMD! You can't FOOL the investors anymore.

  • Report this Comment On January 02, 2014, at 11:38 AM, spacedmarine wrote:

    Sorry this guy has no clue and is probably shorting amd ! As you ca nprobably tell by my username I'm a gamer! Amd graphics cards are best bang for buck atm they have chips in All the consoles which is a steady income stream for next 5-7 years.theyre in the new macs and they decided to stop competing with intel for outright power and speed in cpu's long ago so stop spreading this utter twaddle.I have a laptop and gaming rig with intel/nvidia in them and I love my hardware but trust me amd is looking good and this guy is full of $#! T.sorry for punctuation/spelling but had to put this numpty right!

  • Report this Comment On January 02, 2014, at 11:44 AM, bluesky64 wrote:

    Check this out

    AMD Bitcoin/Litecoin Winner : Wedbush Analyst Luria Jan 2, 2014

    .

    AMD is a big winner in worldwide cryptocurrency movement:

    We believe the majority of these ASIC chips are fabricated at Taiwan Semiconductor (NYSE: TSM) and GlobalFoundries. We also believe AMD (NYSE: AMD) is positioned to benefit from the rise of alternative coins such as Litecoin as AMD chips are preferred by Litecoin miners over other competitor GPU chips."

  • Report this Comment On January 02, 2014, at 12:17 PM, mikedeatworld wrote:

    I agree with many of the post above. AMD is at the 10 year point of a massive turn around.

    SeaMicro - going after big data center players in micro/dense computing like Google, Facebook, Amazon, Verizon for cloud computing

    Apple Mac Pro - Sold Out at launch and its has 2 AMD Graphics Cards inside

    Play Station 4 - Sold over 2 million units with AMD chips inside

    XBox One - Sold over 2 million units with AMD chips inside

    Wii U - Sold a TON of units with AMD chips inside (dont have figures handy)

    AMD Mantle - Video Game Developers are eager to adopt this API - coming soon to Battlefield 4

    AMD GPUs are selling out for Bitcoin and Litecoin mining

    AMD clearly, has a strategy to diversify from the PC space. I think there is too much momentum for AMD to have "troubles in 2014".

  • Report this Comment On January 02, 2014, at 1:23 PM, stockclock wrote:

    The author is not just uninformed, but has an obvious bias. As also pointed out, Motley fool invests in AMD's competitors, which explains it publishing an article such as this. I used to be a subscriber, but am glad I no longer am. A site that sells investment advice, yet provides biased articles such as this makes it hard to trust their research, even if the two remain separated internally.

  • Report this Comment On January 02, 2014, at 1:29 PM, wildpig wrote:

    so very obvious that the article is biased against AMD and in fact is little more than an uninformed negative baseless opinion. timmy green gets a F for evewn trying to accurately report on AMD. in fact I call this article what it is --BS.

  • Report this Comment On January 02, 2014, at 2:58 PM, Scunnerous wrote:

    You should stick to businesses you understand. Parroting INTC propaganda and ignoring its manifest string of blunders is no way to convince that you have a clue here. Do you even have an inkling of what is going on with the 14nm you tout? Do you blissfully assume that EUV is proceeding uhh, nicely? You really think that MDF will triumph against the market momentum again? Sorry, but the Bully is on his butt with a dazed look on his face and is not getting up.

  • Report this Comment On January 02, 2014, at 4:33 PM, mtechac wrote:

    It´s funny to see an investing article that doesn't have a clue on how to make money..

    AMD is a transformed company. It reorganized and it finally is delivering some incredible technology that no other company have. Not even Intel come close.

    If you really understand technology, you will know that that AMDs hybrid CPU/GPU is the architecture of the future and AMD has finally painfully achieved it. Intel is peeing in their pants because chip foundry advantage is no match for a new revolutionary processor archtecture..

    Anybody who has followed AMD over the years and over their stock prices that went all the way to 38+ dollars know the opportunity that they have in front.

    AMD shoots up when they bring revolutionary architectures and AMD is bringing the HSA/hUMA architectures and many other key gaming and graphics technologies..

    People who think Intel is a good stock to make money will soon get a couple of years of bad investment feeling and potential money lost.. Why..? everybody with two grams of brain knows that Intel profit comes from overpricing their products but ARM already started 64 bit processors, which means Intel will continue to lose the laptop business and will begin losing the server and workstation markets.. If Intel does not deeply reorganize and change ots procing model then ... check mate Intel..!!!

    All those smart investor advisors who intelligently pointed out AMD turn around have made huge profits to their readers that bought AMD stock.. The AMD doomers have made their people lose a great opportunity with AMD..

    With AMDs price being at the bottoms of bottoms, AMD investors will make a minimum of %400 over the next one to two years.. while Intel will slide down or ay best will remain where it has been for years..in the lower $20.00s...

    I already made close to %100 with no sweat since I know AMDs technology and where the business is heading..

    I feel sorry for the AMD doomers because they don't know when to take history out of the equation and don't understand AMDs technologies implications...

    I am AMD long all the way and I will just sit down to see my retirement blossom... AMD is 64 bit ARM, is 64 bit x86, %100 gaming console, is pc gaming, is embedded, is high end GPUs, is the game changer HSA/hUMA APUs, etc..etc...

    AMD, with Rory Read and all the other sharp new management, has put AMD in the wonning direction and are ready to profit from all these years of hard work...

    At todays AMD extra low prices, it makes it a win-win situation to invest in AMD.. no other company has this high profit potential...

  • Report this Comment On January 02, 2014, at 4:45 PM, bosorot wrote:

    Great article on par with Ashraf Eassa quality , unbias and very informative.

  • Report this Comment On January 06, 2014, at 10:26 PM, TEBuddy wrote:

    What an ignorant fool, and yes on par with Eassa's biased dribble.

  • Report this Comment On January 11, 2014, at 4:58 PM, MeirElazar wrote:

    I am truly amazed at how the author totally misunderstands what it happening with AMD and in this technology sector at large.

    For 2 quarters AMD has beat earnings estimates and after a steep rise the shorters and analysts managed to manipulate the market and force AMD prices down. This quarter will again bring in an earnings report exceeding expectations but the numbers will be much larger.

    What the author doesn't understand is that while Intel and Nvidia are playing a simple checkers game, AMD is in the middle of a brilliantly complex chess game and they will win. AMD on the one hand is involved in restructuring under Rory Read and it is going as planned and successful.

    AMD is driven by brilliant innovation. AMD was the first company to design the 64 bit x86 and Intel licenses this from AMD and not the reverse. AMD was the first company to produce a 16 core processor. AMD was the first company to have a commercial 5 GHz processor. AMD is the first company to produce an APU (combined cpu and gpu with shared memory for superior integrated performance removing the traditional bottleneck). This APU lead to the 8 core jaguar which won a clean sweep of game consoles. This also led to custom-chips which is another major innovation for AMD. The game consoles bring a show case of AMD's integrated computational, visual, and now auditory superiority to 7 million new homes with recent sales. This is free advertising to entice other customers and companies to use AMD products.

    AMD give better price performance than its competitors and recent AMD discrete gpu cards forces Nvidia to drop its prices. Apple standardized on AMD cards for the new Mac Pro which will increase AMD's market share. New discoveries on exploiting the massive available parallel processing compute power of AMD is enabling many new usages of their graphics cards. One recent success is litecoin mining. Regardless of how one may want to use an AMD powerful graphics gpu, AMD graphics cards are totally sold out everywhere!

    There are different benchmarks used to measure cpus and gpus. It was found out that many of the benchmark were intentionally skewed to favor Intel unfairly and to adversely affect AMD scores. AMD pulled out of this farse. Normally we are talking about percentage that separate competing technologies. AMD found that the Microsoft API were too costly in performance hits. So they worked with other companies and built Mantle to give programmers better control of the hardware and get "close to the metal". Mantle is reported to give a 9 times improvement gain - Yes 900%. This will result in little doubt who has the crown in many graphics intensive applications such as gaming and video productions, etc. Game producer are now migrating more and more towards AMD. AMD is also involved with OpenCl.

    AMD is also diversifying and getting into ARM. Not only that but they bought SeaMicro and are becoming a force in new emerging industries such as microservers with Freedom Fablic support heterogeneous massive cpus in much smaller real estate with enormous memory and power savings. AMD got in the door with both Intel and AMD cpus but it turned out that AMD supported twice the memory that Intel cpus supported and this was a deciding factor in determining that the direction is clearly towards AMD microservers with AMD processors. This in turn present a very interesting scenario where the user get superior performance with his/her AMD apu with talking to the cloud server by an AMD microserver. This led to a major server win with Verizon and there are many more to come.

    By and large Intel and Nvidia are one pony shows. Nvidia focuses on graphics with AMD breathing closely down their necks. Intel focuses on cpus and least nanometers to produce the smallest chips and densest chips. AMD is scaring the daylights out of Nvidia. Intel does not have anything that competes with AMD's gpu which leads to SoC or System on a Chip.

    In conclusion, AMD has a brilliant broad strategy tying together cpus, gpus, memory, software API's and collaboration with numerous tier 1 companies who are moving more and more towards AMD.

    DISCLOSURE: I am long AMD. I will buy and sell shares at any time I can make a profit. I do not read Ashraf Eassa articles or comments.

  • Report this Comment On January 12, 2014, at 9:30 AM, MeirElazar wrote:

    @Bosorot, I agree with @TEbuddy. Motley Fool and most of all Ashraf Eassa are highly prejudiced against AMD and biased for Intel and Nvidia. Eassa often does apples and oranges comparison as was the case of comparing 65w processors with 95w processors. I would encourage people to look to more knowledgeable and informed writers such as Justin Jaynes, Tom Luongo, Equity Flux, and Bottom up Investing. There are a couple other to whom I apologize but they slipped my memory.

    But most of all I object to Eassa who regularly deletes post of people who do not agree with him. I wrote an enormously good comment and he deleted it. I commented on his deletion and a flood of people commented to agree with me. Since then I no longer read ANY articles or comments by Eassa and have standardized my disclosure statement to the following. Many people agree. I also strongly recommend publisher better scrutinize the materials they publish and not publish article that are not worthy.

    DISCLOSURE: I am long AMD. I will buy and sell shares at any time I feel I may profit. I do not read articles or comments by Ashraf Eassa.

  • Report this Comment On January 12, 2014, at 9:31 AM, MeirElazar wrote:

    One last point. I also encourage people to read articles on Seeking Alpha. I find them superior to those published here. Also it is good to read different authors and publishers to get different points of view.

    DISCLOSURE: I am long AMD. I will buy and sell shares at any time I feel I may profit. I do not read articles or comments by Ashraf Eassa.

  • Report this Comment On January 12, 2014, at 10:18 AM, MeirElazar wrote:

    NEWS UPDATE: Analysts have determined that AMD is going to face severe production problems in Q3 of 2351 due to a severe shortage of silicon. Researchers have determined that the cause of the silicon shortage is due to a dramatic surge in breast implants by transgendered albino pygmies of the Moslem Alawite sect in San Diego. This has resulted in massive southward migration of silicon from Silicon Valley towards San Diego. AMD has actively commenced engineering efforts to slow down this southward migration with "Project Brassier". They have also approached the government and private sector resources to solicit additional support. Senior official has stated that they have a good grasp of the subject at hand. Hopefully, they will be able to nip the problem in the bud.

    This news flash is based on FUD distributed by many of the analysts and shorters whose sole purpose is to drive AMD's price down.

    DISCLOSURE: I am long AMD. I will actively buy and sell shares any time that I may profit from this. I do not read articles or comments from Ashraf Eassa.

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