AMD's First-Quarter Results Are a Sign of Greater Things to Come

Expected growth in console sales and growth across different segments make AMD a good long-term bet.

Apr 30, 2014 at 3:05PM

Shares of Advanced Micro Devices (NASDAQ:AMD) soared after the company released strong first-quarter results. AMD came up with a terrific performance, despite a weak PC market, as sales of game consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) boosted its sales.

AMD's first-quarter revenue increased 28% year-over-year to $1.40 billion, topping analysts' expectations, and the company's forecast for the current quarter was higher than consensus estimates. Looking forward, better times lie ahead for AMD due to its strategic moves in several areas.

Console-driven growth
AMD's first-quarter performance demonstrates its success in transforming its business. Management's strategy is working, as it moves away from PCs and targets other growth areas. AMD is on track to generate approximately 50% of its revenue from high-growth markets, including embedded, semi-custom, dense servers, professional graphics, and ultra low-power clients, where it plans to create differentiated solutions by the end of 2015. 

Also, AMD's presence in best-selling gaming consoles is another reason why its performance has been outstanding. There was strong demand for AMD-powered Microsoft and Sony game consoles, which are outpacing the previous generation and driving continued momentum in the semi-custom business.

AMD is combining its unique intellectual property and design expertise with product ideas from customers to jointly deliver tailored solutions. AMD is on track to capture one or two new semi-custom design wins this year as well, with gaming consoles expected to gain more momentum.

According to analyst firm IHS, Sony is expected to sell 49 million PlayStation 4 consoles across the globe in the next five years. On the other hand, Microsoft's Xbox One numbers are expected to come in at 38 million in the next five years.

Sony's PS4 broke all prior records in February, selling 5.3 million units globally since its launch in November. In comparison, the PS3 took 10 months to reach the 5.5 million mark. Moreover, Sony's worldwide presence should lead to better sales of its console, thereby leading to a bump in sales of AMD's semi-custom chips.

Microsoft will now be looking to pull up its socks and provide stronger competition to Sony. Microsoft has fallen behind Sony in terms of unit shipments of the Xbox One. The company has shipped just 5 million Xbox One units, while Sony sits pretty at 7 million so far. However, Microsoft is looking to bump up sales by bundling popular games such as Titanfall to deliver a better value proposition to investors.

Other segments are also gaining momentum
Apart from the console business, revenue from AMD's embedded business is also increasing in the double digits. The company has landed design wins with strategic players in key verticals such as digital signage and medical equipment. AMD sees a total addressable market of $9 billion for its high-performance embedded SOCs and processors, so the company has a big opportunity going forward.

AMD is also seeing some momentum in its professional graphics business. The launch of Apple's Mac Pro, which uses two of AMD's FirePro GPUs, highlights the chipmaker's growing clout. It is expanding the range of its professional GPU products with the new flagship FirePro W9100, which is attracting significant interest from video, design, and engineering professionals who need to work with the latest 4K resolutions and beyond. 

AMD's dense server business revenue is also going up. Verizon's ongoing deployment of AMD's SeaMicro-based dense servers that are powering the world's largest public cloud solutions is a good advertisement of the company's capabilities. AMD is trying to gain a leadership position in the dense server market that's projected to be approximately 25% of the overall server market by 2019. AMD's unique fabric technology and 64-bit processors should help it gain in this area. 

AMD's introduction of Seattle, its first 64-bit ARM server processor, and the industry's first at 28-nm technology, positions it as the only system-on-a-chip provider to bridge the x86 and ARM ecosystems for server applications. Once this solution starts shipping in the fourth quarter of the year, AMD's revenue should see a boost. 

Bottom line
AMD is well-positioned to benefit from different areas. The company's graphics segment is doing well, while semi-custom and embedded solutions, along with the server market, should help it grow in the long run. So, investors should definitely look at AMD for their portfolios.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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