Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What's Next for Advanced Micro Devices?

Advanced Micro Devices  (NASDAQ: AMD  ) may have seen its second-quarter revenue grow 24.1%, but it was only because of a 141% increase in the company's graphics & visual solutions chips revenue. Meanwhile, its PC and server chips segment saw a 20% year-over-year decline in sales, despite peer Intel  (NASDAQ: INTC  ) thoroughly impressing Wall Street with 6% growth in the same segment. Therefore, as graphics and visual chips carry AMD, should you take a leap and buy on the stock weakness?

Wall Street responds to AMD
AMD's stock has fallen nearly 20% in a two-day span following an earnings report that missed expectations to compliment weak guidance. Clearly, the company's weak performance in the PC and server space was in-focus, as this was an area where many investors thought AMD would be strong, especially following Intel's quarter just days before.

However, when it comes to PCs and servers, AMD and Intel are obviously on different ends of the spectrum. Thus, AMD investors are left hoping that strong sales from graphics and visual chips are sustainable. Yet, according to its CEO, Rory Read, those wishes may not be a reality.

What happens next?
For those unfamiliar with AMD's graphics and visual chip business, the company develops the chips used in PlayStation 4 and Xbox One game consoles. In previous years, this was a smaller piece of AMD's business, but due to strong growth, it currently accounts for about half of total revenue.

In 2013, both consoles launched, and with half a decade since a system refresh, demand was quite high for both systems, which have sold more than 14 million units combined since last year. Nonetheless, AMD receives a pretty penny for its part in the hardware, estimated to be between $70-$100 for each system sold. The problem is that such high demand is not sustainable long-term and is historically a low margin business.

With that said, the company doesn't seem to enthusiastic that strong console sales are sustainable through 2014. In fact, AMD expects the third quarter to be its peak quarter for APU (graphic chips) shipments. Furthermore, when asked about this expected drop-off in shipments, Read gave no response, providing no forecast for the fourth quarter or beyond. This, combined with a 10% quarter-over-quarter rise in inventory, has given investors a real reason to feel spooked in looking ahead to the next quarter and beyond.

Failing to make a splash in refreshed PC market
As a result, investors can conclude that once shipments begin to die down, AMD will be left with its core PC CPU/GPU chip business. For investors, this is a problem, as AMD has very little exposure to the higher-margin corporate PC market, which has seen strong growth in 2014 and has been a staple in Intel's strong fundamental performance.

Intel spoke directly on its conference call about signs of an enterprise PC refresh cycle, which is something AMD is failing to experience. Instead, AMD has seen strong performance in other segments of the PC market, such as low-end, where PCs and laptops are built cheaply and carry particularly low margins.

Foolish thoughts
In retrospect, AMD is lagging in the areas where it needs to be strong, outperforming in those where it's better to be weak, and is seeing its single growth driver lose steam. On the contrary, Intel is doing the exact opposite, and the difference is its stock sits at 10-year highs while remaining a favorite among analysts.

Albeit, at 22.3 times forward earnings, it's hard to see much value in AMD, a beaten-down stock that lacks fundamental direction. Moreover, considering the woes that surround it, investors would likely be best suited by putting money to work elsewhere, such as with Intel.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3039209, ~/Articles/ArticleHandler.aspx, 9/1/2015 12:31:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated Moments ago Sponsored by:
DOW 16,185.92 -342.11 -2.07%
S&P 500 1,931.79 -40.39 -2.05%
NASD 4,694.17 -82.34 -1.72%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 12:15 PM
AMD $1.78 Down -0.04 -1.93%
Advanced Micro Dev… CAPS Rating: **
INTC $27.99 Down -0.55 -1.93%
Intel CAPS Rating: ****