Advanced Micro Devices (NASDAQ: AMD ) soared higher by 6% on Friday after the company's CEO had some very bullish remarks on CNBC's "Fast Money" regarding its changing business model. Essentially, the company is executing a strategy similar to industry peers Western Digital (NASDAQ: WDC ) and Seagate Technologies (NASDAQ: STX ) , which might prove especially lucrative if early proof of a PC recovery via Hewlett-Packard (NYSE: HPQ ) and Intel (NASDAQ: INTC ) holds true.
A strategy welcomed by Wall Street
When AMD CEO Rory Reed joined the company in 2011, only 4% of the company's revenue came from non-PC applications. Today, more than 30% of its revenue comes from avenues outside the PC/laptop market.
Specifically, AMD has thrived by supplying the chips used in PlayStation 4 and Xbox One consoles; research firm IHS estimates AMD receives more than $100 for each unit sold. And with 3 million Xbox One consoles and 4.2 million units of the PS4 sold last year, this has become a crucial segment for AMD.
AMD's transition away from PCs highlights an industrywide change that PC component companies have had to implement in order to survive. Western Digital and Seagate Technologies combined control about 85% of the hard-disk drive, or HDD, storage device market. Like AMD, both companies earned the majority of their revenue from PCs five years ago.
However, Seagate and Western Digital have thrived, posting stock gains of 280% and 150%, respectively, in the last two years, by growing in other segments aside from PCs. In particular, HDDs are used in devices such as game consoles and DVRs, although the real upside has come through the cloud. The growth of the cloud has created high demand for increased storage. Furthermore, Western Digital and Seagate have both entered the solid-state drive, or SSD, market, which is also storage but used in smartphones and tablets.
Just 16.9 million of Seagate's 56.8 million total shipped drives in the fourth quarter came from desktops. At one time, this was three-fourths of the business. Western Digital earned 54% of its revenue from non-PC apps, and while similar to Seagate, Western Digital likely makes the better investment of the two in a recovering market.
Western Digital is better because of its market-share gains. The company controls 45% of the HDD market compared to Seagate's 40% share. Although, in January of last year, the two companies shared almost an identical market share, showing Western Digital as the company making the most progress and being the best performer.
Nonetheless, AMD, Western Digital, and Seagate have executed a similar strategy, and in the event of a recovering PC market, have a lot to gain.
Three signs of recovery
For AMD, Western Digital, and Seagate, all three companies have shown an innate ability to innovate. For investors, this is a good sign. Moreover, if the PC market ever does recover, it leaves the companies well-positioned for significant growth, which might be the case looking ahead.
Hewlett-Packard, one of the largest computer manufacturers in the world, saw PC revenue rise 4% in its last quarter, marking its first year-over-year growth in more than two years. CEO Meg Whitman talked about demand for PCs, saying, "consumers are still purchasing tablets, but they are also seeing that PCs are necessary in a new world of big data and analytics." It seems that HP is expecting a PC turnaround, which could bode well for its stock and component makers.
Then, there's Intel, which is a direct competitor of AMD. Intel earns more than 60% of its total revenue from its PC business, and in its last quarter, sales in the segment were flat. This came after a 3% drop in the prior quarter. Combined with HP's performance, this further implies a turnaround.
Lastly, in data that bodes well for the industry and HDD leaders, IDC recently announced that in the fourth quarter, sales of external disk storage systems rose 2.4%, year over year, versus a loss of 3.5% in the third quarter. For Western Digital and Seagate, this is great news, but combined with other data, it all equals a recovery of sorts for the PC industry.
In the event of a full-blown PC recovery, each of these five companies will see fundamental growth and stock gains. However, AMD, Western Digital, and Seagate in particular look to gain the most, as each relied almost solely on the PC segment in the past, but have made changes to reflect market demand, and remain well-positioned if the PC market decides to recover.
AMD might have the most to gain; 70% of its revenue is still tied to the PC market, meaning growth would almost certainly spark fundamental gains. Also, in the last three years, AMD is the only one of these stocks to have traded with a loss, losing about half its valuation. AMD has a lot of ground to gain, and with all signs pointing to a recovery, it seems that shares of AMD could be significantly more valuable in the quarters ahead.
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