Is It Time to Buy AMD?

On April 17, shares of Advanced Micro Devices  (NASDAQ: AMD  ) jumped more than 12% after having posted better than expected first-quarter earnings. This is in large part due to the company showing strong signals that its three-step turnaround amid a weakening PC market is starting to show signs of long-lasting successes, with half its revenue coming from markets other than the PC. So, with AMD seeing somewhat of a resurgence, instilling new found confidence in long-term investors, is now the time for new investors to jump in?

A closer look at AMD's impressive quarter
AMD reported revenues of $1.40 billion, an increase of 28% year over year with a gross margin of 35%. Although the company had a net loss of $20 million, on an adjusted basis (non-GAAP), AMD posted a net income of $12 million, or $0.02 earnings per share.

The increase in revenue is largely attributed by the graphics and visual solutions segment -- the division responsible in designing the custom chipsets found in the PlayStation 4 and Xbox One -- which saw 118% year-over-year growth, though it had a 15% decline sequentially. The division accounted for nearly half of all AMD's revenue, about $734 million. Operating income was $91 million for the quarter, compared with $121 million for the previous quarter partly due to decreased revenue from semicustom chipsets.

With the continued decline in the PC market, the computing solutions (CPUs & APUs) segment suffered a decrease of 12% year over year. This is largely attributed to a decrease in client unit shipments, which resulted in an operating loss of $3 million. On the bright side, this is a substantial improvement year over year, where the losses were $39 million.

It seems that AMD is effectively restructuring its computing solutions segment into one that can potentially yield small profits, or at the very least break even in the new few quarters. This is a great news especially given that AMD is planning to move further away from its core business, the x86 chipset, with a new partnership that has real potential in improving the company's bottom line.

A new partnership
As of late, ARM (NASDAQ: ARMH  ) and AMD have been developing a rather close relationship. In 2014, AMD will be launching the first 64-bit ARM-based server CPU at 28 nanometers. While ARM chips are one of the most used in the world -- about 4.3 billion people touch a device carrying an ARM chip each day -- AMD and ARM are entering a market where Intel commands a staggering 97%. On the other end, AMD's market share has declined to 3% from 10% in 2009.

The partnership with ARM has become increasingly more important in the past few days with AMD outlining new efforts, which further moves the company away from the x86 architecture with the unveiling of Project Skybridge. The project will yield a new 20nm x86 chip and an ARM SoCs that are interchangeable with one another. Basically, there will be a single chipset/socket that can take either the ARM or x86 CPU, depending on whether the product runs Android or Windows. The real potential lies in pairing the ARM chipset with AMD's Graphic Core Next GPUs alongside AMD's led initiative in standardizing Heterogeneous System Architecture, which ARM is also heavily invested in.

Can the potential end of x86 be a turning point for AMD?
Regardless of how ARM-equipped servers stack against Intel's, I can't see any significant gains in the short-term, and it's even harder to even imagine any in the long. Intel's dominance has allowed for a situation where it can charge "higher pricing that would be ordinarily possible," but the savings that can be made from switching over to an ARM server will quickly be mitigated and possibly more expensive. This is due to ARM CPUs being entirely different than the x86 chipset, meaning server admins as well as software engineers and scientists will have to spend countless hours learning in developing and maintaining for a new platform that is looking to be less powerful than Intel's offerings. The opportunity costs would be an undertaking for a business of any size. 

On the other hand, I do see potential with Project Skybridge. A lot of analysts are still skeptical -- and deservingly so -- as to how AMD can continue to find success with its semicustom chipsets now that the Xbox One and PlayStation 4 have been completed. AMD has invested heavily in HSA, and with the company recently having successfully launched its first APU that features GCN architecture the company is poised for big gains in the low-powered-device market. I expect AMD to gain several new contracts to design new products using Project Snowblind, such as tablet, set-top boxes, televisions, and such.

The Foolish bottom line
AMD has built a strong foundation with its continued success in the graphics and visuals solutions segment, and its diversification strategy is starting to show real signs in potentially turning the company around. Long-term investors and fans of the company have a lot to cheer for, but I still wouldn't bet on the stock just yet. By the end of next year, AMD expects 50% of its revenue coming from markets other than PCs, remaining consistent with its first-quarter results. If the company can improve upon those numbers by 2015, then AMD could see a massive turnaround. My eyes are watching.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2014, at 1:47 PM, chrispycrunch wrote:

    For a stock that is worth $6, it's a strong buy.

  • Report this Comment On May 13, 2014, at 2:10 PM, keeperoftheq wrote:

    Why we will see a stronger Q2, Q3 & Q4 report and strong guidance for all of 2014


    Q3 & Q4 are the strongest quarters for the chip makers. We already know that Microsoft will be launching the Xbox One in 25 countries including China in September. Microsoft will have to order Milions of APU's from AMD for this launch. Sony can not keep up with the demand the PS4. Demand is so strong that Global Foundries was added as a second source for the console chips.

    AMD even after forecasting continuation of PC sales declining stated that AMD would actually show increased in the PC decision. Knowing that PC sales have stabilized, we can expect AMD PC revenue to substantially increase. With Beema and Mullins release, we will see more design wins going forward.

    This will give AMD a strong Q2 report along with strong guidance.

    Now we are looking forward to Q4 which is the strongest quarter of the year. Game consoles, historically, are sold in Q 4 equals the rest of the other 3 quarters combined. The console APU's will have to start shipping in Q3 in perpetration for the holiday quarter.

    We should see AMD reporting a stronger Q3 and stronger guidance for Q4.

    Q4 will also see the launch of the AMD / ARM Seattle servers. This will add even more to the bottom line.

    To add icing to the cake, AMD has not been able to keep up with the strong demand for their GPU's, Global Foundries was added as a second source and will be producing the GPU's in Q2. This will allow for more GPU's to flow into the market and keeping the shelves stocked. Prior quarters the cyber coin minors has been buying up all these GPU's leaving the gamers and DYI croud no choice but to buy from nVidia. This will lead AMD gaining market share away fro nVidia.

  • Report this Comment On May 13, 2014, at 6:08 PM, H2323 wrote:

    It was at $3.20

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Rodmon Dehghi

Rodmon Dehghi has been writing for The Motley Fool since November 2013 and is interested in covering economics, media, energy, technology and most surprisingly, he would rather research and write about the gaming market than have his hands grip a controller.

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