Game Consoles Can't Make Up for AMD's Problems

Shares of AMD (NYSE: AMD  ) slumped after the company reported in-line earnings, with investors focusing on share losses in the PC business to Intel (NASDAQ: INTC  ) . The launch of the PlayStation 4 and Xbox One boosted revenue significantly, but AMD's core CPU business is still in rough shape.

A look at the results
AMD reported revenue of $1.59 billion for the quarter, up 38% year-over-year; this was due mainly to the launch of the PlayStation 4 and Xbox One. Annual revenue fell 2% to $5.3 billion, with weak PC chip sales causing the decline. AMD managed to turn a profit in the quarter, with an operating income of $135 million and a net income of $89 million. This is a significant reversal from the same period last year, when AMD reported an operating loss of $422 million.

The computing solutions segment, which includes both PC and server chips, declined by about 13% year-over-year, but AMD was able to turn a $323 million operating loss in the fourth quarter of last year into just a $7 million operating loss in the fourth quarter of this year. While the continued decline is troubling, suggesting that competitor Intel is stealing away some of AMD's market share, the company appears to be doing a better job at keeping costs in check.

Marketing, general, and administrative costs fell by 12.4% year-over-year. R&D spending also decreased, generally not a good sign for a company trying to compete in an industry where a technological advantage is extremely important. While both Intel and graphics chip competitor NVIDIA (NASDAQ: NVDA  ) have been increasing R&D spending, AMD has been doing the exact opposite. While this may boost short-term profitability, it may spell trouble in the long term.

AMD's PC strategy
AMD's computing solutions business shrunk compared to last quarter as well as year-over-year, declining by 8.6% sequentially. In the third quarter, AMD managed an operating income of $22 million for the segment, compared to the operating loss of $7 million in the fourth quarter.

With Intel having vastly greater resources than AMD, there's really no way that AMD can compete effectively in the CPU business. AMD is spread too thin, trying to compete in too many businesses, and Intel's lead is at this point insurmountable. AMD has bet on better graphics instead of faster CPUs, with its recently released Kaveri line of processors enabling modern games to be played without a discrete graphics card.

AMD's high-end Kaveri processor, the A10-7850K, retails for around $179. This is far less expensive than a comparable Intel CPU combined with a discrete graphics card, and benchmarks have shown that Kaveri is perfectly capable of playing most modern games at low settings. Kaveri is aimed at the casual PC gamer, as it can't touch even a mid-range discrete graphics card in terms of performance, and it allows for a low-end gaming PC to be built for less than an Intel-based system with a low-end discrete graphics card.

This isn't a bad strategy for AMD. In fact, it's likely the only one that makes sense, since competing with Intel on CPU performance is a non-starter. There's certainly a market for budget gaming PCs, and AMD seems right on the money with Kaveri. But any market with the word "budget" in the name isn't going to be a source of high margins, and it remains to be seen if Kaveri can propel AMD's computing solutions division to meaningful profitability.

Any GPU share gains may not last
AMD's graphics and visual solutions segment, which includes both the GPU business and the console chip business, grew from $326 million to $865 million in revenue year-over-year as both the PS4 and Xbox One saw strong demand. The release of new GPUs toward the end of the year also drove sales, with high-end cards reportedly selling out due to demand from cryptocurrency miners.

AMD may have picked up market share from NVIDIA in the fourth quarter, although we won't know for sure until NVIDIA reports its earnings in mid-February. NVIDIA's next GPU architecture, Maxwell, is expected to be unveiled in the next few months, and any market share gains that AMD may have enjoyed will likely evaporate at that time. With NVIDIA, a company solely focused on graphics, outspending AMD in terms of R&D, AMD is running the risk that NVIDIA pulls ahead of it in the graphics department much like Intel has pulled ahead of it in the CPU department.

The bottom line
AMD is in the middle of a turnaround, and while the company has largely stopped the bleeding, I'm not convinced that AMD can return to consistent profitability. The fourth quarter was helped tremendously by the release of the game consoles, and while AMD will continue to get revenue from the PS4 and Xbox One going forward, the core business is still doing poorly.

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  • Report this Comment On January 30, 2014, at 9:16 AM, markstomarks wrote:

    Notice how each time AMD puts out objective good news, the fool rushes in the bash and post bad subjective news?

    This tells me someone pertaining to the fool is in a panic from going short. Take your loses now and get over it. Shorts rarely make money. Only about 3% of them do and they are smart people.

    Longs are the ones with higher percentage of making money such as 10% but most people just lose money in the markets because they are not qualified to invest or trade. It takes years of experience and really understanding many things including certain types of psychology.

    These subjective articles are not going to help shorts out. Take our loses, learn from it and go long a stock.

  • Report this Comment On January 30, 2014, at 9:24 AM, keeperoftheq wrote:

    Perhaps Timothy Green need to look at the 2nd half of 2014. AMD is not just sitting idol and doing nothing. AMD will be the first and only company to bridge ARM with X86 for the server market. The GPU market is doing good for AMD and will do even better as mantle get released.

    Timothy is a Nvidia investor and what amd reading is him trying to pump NVDAA.

    When you see writers like Timothy Green say "AMD may not...." it also holds true that AMD "may"...

    Once Mantle is released it will be used in Kaveri. This will greatly improve the performance. Timothy Green leaving information like this out only show he is not a objective writer.

    AMD has continued to become less dependent on the PC market. This is making AMD a much stronger and healthier AMD.

  • Report this Comment On January 30, 2014, at 9:31 AM, keeperoftheq wrote:

    I do not recall anyone ever saying that AMD was depending on the game consoles to take care of everything.

    Timothy green pick one section and only one section , why.

    Why did Timothy Green leave out Mantle? HSA? ARM?

    It is because his agenda is not AMD. His agenda is to make NVDA look better before earnings. I have new for him. I look for NVDA to miss and give poor guidance. NVDA is losing market share to AMD and intel.

  • Report this Comment On January 30, 2014, at 9:34 AM, MAP1288 wrote:

    Don't sweat it. The good news is that the MF writers (largely) are extremely unprofessional and biased, and are not taken seriously in any circles. To put it simply, their articles can't move the needle at all in AMD. I'm always up for good, objective financial information.......but I wouldn't pay a dime for the garbage the MF spews......in particular a few of their writers. I think most of us will agree that critical analysis can be very good, but it must be objective.....there is nothing objective coming out of MF.....lower than the national enquirer in integrity.

  • Report this Comment On January 30, 2014, at 9:49 AM, KenLuskin wrote:

    Created by Ken Luskin January 27, 2014

    KenLuskin@gmail.com

    SIGNS of a PARADIGM SHIFT in COMPUTING that are leading to a TIPPING POINT for AMD

    Malcom Gladwell, in his book, The Tipping Point: How Little Things Can Make a Big Difference, defines it as “the moment of critical mass, the threshold, the boiling point,” where “ideas and products and messages and behaviors spread like viruses do.”

    Think of a Paradigm Shift as a change from one way of thinking to another. It's a revolution, a transformation, a sort of metamorphosis. It just does not happen, but rather it is driven by agents of change.

    CPU domination is ending

    Computing has been dominated by a type of processor called the CPU, or central processing unit. The processing of information is based upon one logical computation after another in a sequence. It is called threaded, much as a needle leads a thread to a logical endpoint, and then a new thread is started.

    But, the real world presents so much information in the form of light rays hitting our eyes, and sounds to our ears, that using a CPU to process this info is extremely inefficient. This type of processing requires numerous computations to be all done simultaneously, rather than sequentially.

    For the purposes of processing real world information, parallel processing was invented. Many CPUs are strung together, and this forms a supercomputer, that can do parallel processing. That means it can simultaneously process a huge amount of information.

    The GPU is BORN

    Finally in the late 1990s, a new processor was invented for massively parallel processing. These processors are called GPUs, for graphical processing unit. The first uses of GPUs were and still are graphical information. The main current use of GPUs outside of accelerating the speed of a supercomputer, is for rendering digital images.

    Instead of a CPU drawing one dot, or pixel at a time on a screen, a GPU creates all the pixels at the same time. Without a GPU, the rendering of digital images is extremely inefficient.

    GPUs have been mainly used to create digital images for video games. A program is created that tells the GPU what to render.

    AAA video gaming is a significantly larger industry than Hollywood. Most of the highest grossing video games cost more to create than the average Hollywood movie. The vast amounts of money spent on the video game industry are the driving force in funding the development of GPUs. It is no coincidence that the 2 leading GPU design companies are the main suppliers of discrete GPU graphic cards for PCs.

    THE FIRST SIGN: GAME CONSOLES

    AMD used their 64 bit X86 CPU architecture to create an Accelerated Processing Unit, or APU. The APU is AMD’s way of uniting a CPU with their own proprietary GPU architecture, onto one die or chip. Intel, Qualcomm, Nvidia, etc. also have a GPU integrated onto a single chip, which is called an SoC, or system on a chip.

    AMD’s APUs are 64 bit, combined with significantly greater GPU power than Intel has, is the reason that Sony and Microsoft chose them to power their new game consoles. Because the only other major game console maker, Nintendo, is also using AMD Graphics, AMD has total domination of the AAA video game GPU architecture.

    Almost all new AAA video games are optimized for the game consoles, and then ported over for use on a PC. AMD worked closely with Sony and MSFT to create application programing interfaces, or APIs, that would be much more efficient than the API that is currently used on PCs. The APIs on the new Xbox1 and PS4 allows video game developers to send commands directly to the GPU portion of the AMD APU, rather than to be first sent to the CPU. These APIs reduces the need for a super fast CPU, while increasing the overall speed that can programs can be rendered. AMD’s GPU architecture is different from that of Nvidia and Intel. Because all new AAA video games will be optimized for AMD architecture, they will run better on PCs using AMD GPUs.

    THE SECOND SIGN : MANTLE API

    The speed of the processors is measured in GigaHertz, or GHz. While the CPU portion of the AMD APUs are running at 2GHz or more, the GPU portion is running at 1 GHz or less. The equivalent of the console APIs was created by AMD for PCs, and is called MANTLE. If a game is NOT designed using the Mantle API, then the commands must first be sent to the CPU, then relayed to the GPU. Therefore, a slightly faster CPU will increase the speed of the game. Because of this situation, many hardcore gamers chose to buy a faster CPU from Intel.

    Now, that ALL new games will be created for the new consoles, most developers will choose to use the Mantle API when they port over for play on a PC, to replicate the experience on the consoles.

    AMD has reported that 20 new games, which is the bulk of the new AAA games this year, will be supporting Mantle.

    One of the most successful AAA game franchises is called Battlefield, and their newest game Battlefield 4, is reported to run 45% faster when using Mantle.

    The MANTLE API is the main reason that AMD has indicated they have more than 50% of the design wins for discrete GPUs in Laptops that will be released this year. Laptops OEMs know that they will be at a competitive disadvantage if they use Nvidia discrete GPUs, after it becomes widely known that new AAA games will run significantly better on AMD GPUs.

    THIRD SIGN : MICROSOFT and ORACLE SUPPORTING HSA

    AMD created the HSA foundation to share some of their APU architecture with the rest of the chip industry so as to make it an open standard. AMD’s APU architecture was so compelling that they were able to enlist ARM Holdings, SAMSUNG, QUALCOMM, and TEXAS INSTRUMENTS as founding members of the HSA foundation. The reason that AMD and these companies are supporting a new open standard for chip architecture is so the large operating systems and software developers will also support it. But, AMD is the largest beneficiary of the HSA architecture, which is in the chips powering the MSFT and Sony consoles, but also in their newest PC chip called KAVERI.

    HSA architecture in Kaveri allows Operating systems and programs direct access to the GPU portion, and allows the GPU and CPU to share a common memory. This allows the power of the GPU to be more easily accessed by common programs, and increases the efficiency of the chip, because of a shared memory.

    In general, a GPU can produce 5 times as many Gigaflops as the CPU. So, while not all tasks are suited for the GPU, there are many that are now being handled by the CPU which could be much better processed by the GPU.

    Hardware, such as a microchip, greatly benefits from the amount of software supporting it, which creates an ECOSYSTEM

    The success of Intel is mostly based upon the fact that Microsoft chose to optimize MS DOS/Windows operating system for Intel’s X86 architecture.

    The success of ARM is because Apple and Google created mobile operating systems that support its CPU architecture.

    AMD already has all 3 game console makers using its GPU architecture. Which means all the new AAA games are being optimized for AMD architecture. The creation of the MANTLE API will translate AMD’s console GPU domination over to PC gaming.

    Support for AMD’s HSA foundation architecture by Microsoft and Oracle, is a good sign that other software will also be optimized to support it.

    FOURTH SIGN: THE NEW ERA of COMPUTING REQUIRES MORE GPU PROCESSING POWER

    The new era of computing is based upon computers processing real world inputs, rather than relying upon programs or input from a keyboard. This video December 2013 Embedded Vision Alliance Member Meeting Presentation: "The GPU’s Role

    in Vision Systems," Dr. Jon Peddie, Jon Peddie Research

    is 50 minutes, but it is well worth watching, if you really want to understand what I am trying to convey.

    The new era of computing requires the massive parallel processing power of a supercomputer, but at an affordable price for the average person.

    Because the GPU can process vast amounts of information at 5 times the power of the CPU, it will be increasingly relied upon, rather than CPU.

    Efficient voice processing is mainly done in the cloud because of the massive processing power required. But, since all computers, even smart phones have integrated graphics, other less complicated tasks can be done on the device.

    The AMD powered Xbox1 has powerful sound and vision recognition. The Xbox1 has infrared vision, which means it can see in the dark! The Xbox1 can recognize and differentiate between people based upon their voice, and where they are sitting or standing in a room.

    CONCLUSION

    While Intel is charging $300 for their core i7 chip, AMD is charging MSFT $100 for the APU that powers the Xbox1.

    AMD’s APUs have powerful integrated graphics at an affordable price, which is why they are positioned to dominate in providing processors for the new era in computing.

    The new era in computing is a classic paradigm shift. Cloud computing and increased wireless communication bandwidth are already recognized as the driving forces in this paradigm shift.

    Increased use of the GPU is not yet recognized by most investors as a paradigm shift in computing.

    A huge opportunity exists to invest in AMD, before the trend becomes more apparent, resulting in surging sales and earnings.

  • Report this Comment On January 30, 2014, at 10:24 AM, bluesky64 wrote:

    What is wrong with AMD

    Someone need to make a Motly Fool battlefeild game.

    Dogging AMD each day.

    Voted AMD 2014 great American turnaround story.

    Every day AMD is and will continue to push forward with great results.

    Here are just 2 new one today

    Socketed Kabini Processors Rumored For March

    http://www.anandtech.com/show/7725/socketed-kabini-processor...

    AMD officially launches Mantle, new driver and patches available soon

    http://www.techspot.com/news/55500-amd-officially-launches-m...

    Try to take a step back and look at the big picture AMD is forging ahead.

  • Report this Comment On January 30, 2014, at 11:01 AM, KenLuskin wrote:

    I do NOT see the downside in AMD barring a world wide depression.

    AMD's PC business is now too small for Intel to damage.

    The real damage in the PC area has not come from Intel, but from Tablets.

    AMD has shifted their mix towards commercialal desktop, which is NOT in competition with Tablets.

    Intel will do about $8 billion in PC sales in Q1, while AMD is guiding to slightly over $500 million.

    Since AMD's prices are at least 10% to 20% lower than Intel, there is NO way Intel can increase sales and income by lowering prices.

    If Intel lowers prices 10% on the $5 billion of low to medium end chips, that reduces sales and profits by $500 million, and puts downward pressure on their high end.

    OEMs will do continue to do business with AMD, because they want to use them to keep Intel honest.

    With PC sales stabilizing, especially in the desktops, combined with AMD's cost reductions, AMD will NOT lose any appreciable $$ in the PC area.

    Meanwhile, GRAPHICS sales are EXPLODING!

    1) Apple head of Graphics joined AMD in April 2013

    2) Nvidia head of sales joined AMD in Jan 2013

    3) Nvidia head of Professional graphics joined AMD in Oct. 2013

    ANALysts and most investors are making the CLASSIC mistake of focusing on the OLD business, while the NEW business is exploding.

    Same thing happened at Apple in 2003 until mid 2004.

    Very few people understood Apple's dominance of music.... When they finally woke up, Apple stock EXPLODED!

    Same thing will happen to AMD over the next few years.

    Server opportunity is the icing on the GRAPHICS cake!

  • Report this Comment On January 30, 2014, at 12:46 PM, wownwow wrote:

    "Game Consoles Can't Make Up for AMD's Problems"

    Just a half-bottole-empty view. Try to see and present it in a half-bottle-full view.

  • Report this Comment On January 30, 2014, at 12:47 PM, bluesky64 wrote:

    Timothy,

    Here a complete report after reading all you thought let see who is closer.

    http://www.scribd.com/doc/203457003/AMD-UNDERESTIMATED-GUIDA...

  • Report this Comment On January 30, 2014, at 1:36 PM, meinskiff wrote:

    Hmmm,

    Green's analysis is so transparently bias that I would not take it too seriously. While there is an obvious ulterior motive, anyone in the know who reads this will be asking themselves; why doesn't he swallow his pride and tell the whole truth - the halve truths only damage his reputation and conversely, support the stock.

    Go figure....?

  • Report this Comment On January 30, 2014, at 8:34 PM, wownwow wrote:

    Is there is a possibility that Mostly Fool is misspelled as Motley Fool?

  • Report this Comment On January 30, 2014, at 9:41 PM, rav55 wrote:

    Consoles given AMD about a 10% gain in market share of x86 deliverables. Every x86 cpu that AMD sells is one less that Intel sells. Intel has 2 consumer markets, servers and personal computers of which laptops are a subset. AMD has three x86 markets and are opening an fourth possibly fifth: x86 servers and pc's AND console or custom applications and they are opening markets in the ARM ecosystem to include servers and possibly tablets.

    Every ARM Server that AMD sells is one less x86 server that Intel sells.

    ANY DOWNTICK in Intel server percentage will be seen as weakness and Intel stock will crash.

    Intel has nowhere to go but down. That's what happens when you try to monopolise a market, eventually compitition finds a way to bring you down.

  • Report this Comment On January 30, 2014, at 10:29 PM, x000ald000x wrote:

    Let's not forget the huge short interest in AMD that has to cover. There is little certainty in this life other than the requirement to cover a short position. Short covering provides an underpinning to the stock price.which reduces its risk.

    AMD is priced as if it were at imminent risk of bankruptcy. But that is old news.

    3 B market cap? That is less than Google paid for freaking NEST, a startup that basically had only a wi-fi connected home thermostat!

    Compare that to the IP and product portfolio held by AMD.

    OK so AMD has debt to work down, but if it can stay cash flow positive, that should not be a problem, and then the leverage actually becomes a good thing for stock holders.

    I guess I am preaching to the choir. I just cannot bring myself to buy social media stocks that can often be obsoleted by one killer app.

    Hardware is difficult and gets no respect, but thats where there is real value.

  • Report this Comment On January 31, 2014, at 2:30 PM, wownwow wrote:

    Intel's mistake is squeezing AMD too much instead of letting AMD be a healthy (profitable) #2 to keep assiting it in x86.

    AMD was forced to find a capable CEO (Mr. Rory Read) and has been finding new lovers (markets) instead of sticking with the same old lover and is getting happier and happier.

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