Advanced Micro Devices, Inc.: A Renewed Outlook for 2014

A volatile history has discouraged many investors from taking any position in Advanced Micro Devices,  (NASDAQ: AMD  ) . In previous years, it has suffered from a declining market share in the PC market as competitors continued their efforts to drive the company out. However, few investors seem to be willing to credit AMD for the major strides it has made in restructuring its business and returning itself to profitability. Rather than investing heavily in a futile attempt to regain its position in the PC market (which is already a dying market, in any case), AMD has focused its efforts on stepping into emerging markets and securing its share of these markets early on.

Instead of focusing on AMD's declining presence in the PC market, investors should be looking at the new developments and the new trajectory this company has undertaken.

Getting itself out of a slump
In another step toward securing its share of the embedded market, AMD announced a new agreement with Mentor Graphics Corporation (NASDAQ: MENT  ) to expand the availability of open-source embedded Linux-based development for AMD's line of heterogeneous and multi-core processors. The new offerings are also intended to simplify the process for embedded developers.

News of this deal pushed the company's stock above $4 per share on the first of April. However, with a five-year history of volatility and a relatively stagnant past three months, AMD has to do more than that to prove itself a buy.

In order to remain competitive, AMD has had to make some strategic changes to its business plan and the embedded market seems like the right place for it to go since it is wide enough, sparsely populated with companies, and in need of more variety for consumers and enterprise customers alike.

The agreement with Mentor Graphics Corporation will help secure AMD's position and add to a sustainable, long-term business plan that should help pull the company out of its multiyear slump and bring it into a new upswing.

Significant strides in graphics
In the second branch of the company's two-part business plan (computing solutions and graphics), there has been progress as well. On April 8, AMD launched a fast, powerful, new graphics card, which is claimed to be the best in the world to date.

The announcement resulted in a more than 2% boost to the AMD stock and should continue to increase the market value as game developers and enthusiasts alike drum up excitement about the new technology.

Due to go on sale later this month, the company's graphics business is set to see some substantial gains in 2014 as the new graphics card will be used in a variety of gaming consoles, personal computers, and even the new Mac Pro from Apple. AMD may even be able to convince Apple to use the new graphics card in its other upcoming releases such as the MacBook and the iMac. While Apple is currently using graphics cards from other companies for many of its devices, AMD's competitively priced (and potentially more powerful) Radeon graphics card should seduce Apple to switch over.

The revised deal with GlobalFoundries
Due to its growing prospects for 2014 in both its computing solutions business and its graphics business, AMD has revised its purchase agreement (known as the Wafer Supply Agreement, or WSA) with its main supplier, GlobalFoundries. It has committed to purchasing $1.2 billion in products from the manufacturer over the course of 2014, up from the $960 million worth of products it purchased last year.

The increase in spending is not expected to affect the company's fiscal outlook as the potential increase in sales should help to keep AMD on track to meet its target profit margins for the year.

By refocusing its business strategy for the coming years, AMD has made itself, once again, an attractive stock for long term and enterprise investors. With the transformation of the company at such early stages, the current market price is a bargain as AMD shows every sign of returning to its former success. There is a lot of underrated potential to be found in this company and those who invest early on will see the biggest gains.

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  • Report this Comment On April 12, 2014, at 9:56 AM, smallormidcapman wrote:

    Your interpretation of the 2014 WSA with GloFo is completely inaccurate. It is not "increased spending" nor is there any "growing prospects for 2014 in its computing solutions business". Here are the facts:

    AMD was short on their 2013 WSA by $190 million. They agreed to $1.15 billion and they only spent $960 million. This $960 million was spent 100% on CPU and APU parts...ZERO graphics parts were produced at GloFo in 2013...those GPU parts were made at TSMC. In 2012 the "take or pay" penalty for such a miss was $320 million. In order for the "take or pay" penalty to be forgiven for the $190 million miss in 2013 the following happened:

    1. The 2014 WSA was 4 months LATE in being announced per the CFO's call in October that it be announced in "30 - 60 days".

    2. In order to be forgiven the $190 million shortfall in 2013, AMD had to commit to a much higher amount for the 2014 WSA...thus the $1.2 billion. This is NOT from increased demand or anything is payback to GloFo for falling $190 million short in 2013 and being forgiven that amount in "take or pay" penalties.

    3. In order for AMD to meet the $1.2 billion commitment to GloFo in 2014, they were forced to move their semi-custom GPU game console parts (cGPU) and some discrete GPU parts (dGPU) parts from TSMC to GloFo.

    4. AMD has forcast the computing solutions group to be down 10% in 2014. If they spent $960 million in 2013, that implies a 2014 spend of roughly $865 million on CPU and APU parts from GloFo. Therefore, the extra $335 million to meet the $1.2 agreement will be cGPU and dGPU parts.

    Any other reading of this 2014 WSA is just plain WRONG. GloFo didn't let AMD off the hook for $190 million for missing their commitment in 2013...they simply moved it forward to 2014. AMD wanted to be well below $1 billion for the 2014 WSA but they were stuck...and the price for getting off the hook for the $190 million miss in "take or pay" penalties was agreeing to a higher 2014 WSA than AMD wanted.

    These facts are readily available from AMD and a bit of due diligence research on the subject...

  • Report this Comment On April 12, 2014, at 11:17 AM, guluj wrote:

    AMD has demand this year for all its parts and it makes sense to increase its Wafer Supply Agreement this year to 1.2B rather than pay the penalty for the slump in PC sales in last year. It makes good business sense. Their revenue has increased from 1.2B in 2013 Jan to 1.6B in 2014 Jan., an increase of about 40% year over year. Also, Global Foundries has allocated 10B new investments to further ramp up their 22nm and 14nm production.

  • Report this Comment On April 12, 2014, at 2:56 PM, jkubinak1339 wrote:

    "AMD has forcast the computing solutions group to be down 10% in 2014"

    smallormidcapman - you should do your due dilligence - AMD will product and sell more chips this year then last - that is obvious. they didnt have console revs until Q3 last year and they will have 4 quarters worth of that this year - and for those who think those chips dont count (because AMD counts them on the graphics side) its just ridiculous.

    AMD wanted to move production over to Glofo to protect against penalties - seems like a smart move (although the agreement itself is aweful)

    AMD like it or not is doing the right things to make a long term business model work.

  • Report this Comment On April 12, 2014, at 4:23 PM, binartech wrote:


    May be your partially correct that AMD want to compansate GF, however if you do the math, there's no way AMD will purchase just 1.2B wafer, so TSMC will still produce part of AMD chips and may be they where negotiating with TSMC how to reduce part and move them to GF, eventhough I do not think they will move console chips to a GF, you do not move something allready in production and you require ASAP to a new Foundry.

    All mistery will end april 17.

  • Report this Comment On April 12, 2014, at 9:30 PM, smallormidcapman wrote:

    From the AMD press release verbatim:

    "Under this amendment AMD expects to pay GLOBALFOUNDRIES approximately $1.2 billion in 2014. These purchases contemplate AMD's current PC market expectations and the manufacturing of certain Graphics Processor Units (GPUs) and semi-custom game console products at GLOBALFOUNDRIES in 2014."

    There is no doubt that they moved semi custom GPU (console chips) and a few discrete GPUs to GloFo from TSMC to hit the $350ish million in NON CPU/APU products needed to hit $1.2 Billion. GloFo is at 28 nm just like TSMC so the parts can stay on the same process node.

    The thing to watch is OpEx for this first quarter and next. Moving a mature product from one fab (TSMC) to another (GloFo) is VERY expensive with tape outs and yield issues. The ONLY reason you move a mature product is because you HAVE to...and AMD had to or face "take or pay" penalties associated with the $190 million shortfall in the 2013 WSA.

  • Report this Comment On April 12, 2014, at 9:51 PM, smallormidcapman wrote:

    "smallormidcapman - you should do your due dilligence - AMD will product and sell more chips this year then last - that is obvious"

    AMD's revenue is broken down into two departments. One is "Computing Solutions" or "CS" and that is only CPUs and APUs. The other department is "Graphics & Video Solutions" or "GVS" and that is ALL GPUs (including console chips).

    There is no doubt at all that the computing solutions group will be DOWN in 2014...AMD guided down "10%". The million dollar question is how much will it be down? Intel is CRUSHING AMD at the mid to high end AND have been taking HUGE share from AMD in the traditionally strong low end...especially laptop.

    The graphics business is THE bright spot with AMD along with embedded and Sea Micro servers. BUT AMD shares WILL fall if the CS revenue comes in weak as I suspect it will.

    I was long 27,500 shares last quarter and snuck out with a VERY small gain after starting to buy at $3.15-$3.75. I am not an idiot basher...

  • Report this Comment On May 06, 2014, at 12:29 PM, romeras wrote:

    EU court to rule June 12 on Intel challenge to $1.5 billion EU fine

    (Reuters) - Europe's second-highest court will rule next month on U.S. chipmaker Intel Corp's challenge to a record 1.06-billion-euro ($1.47 billion / 869.7 million pounds) fine levied by EU antitrust regulators five years ago, a court official said on Tuesday.

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