Advanced Micro Devices (NYSE: AMD) is in a bit of a quandary right about now. The company is at a pivotal crossroads as it embarks on a new strategy, and so far its moves are making a doubter out of me -- so much so that I'm going to go ahead and give AMD a CAPScall today that it will underperform the broader market going forward.
Bold news or a cold fuse?
Earlier this month, AMD announced an oxymoronic strategic update aimed at cutting down its cost structure and simultaneously investing in innovation. I'm not alone in my skepticism: Fellow Fool Anders Bylund agrees.
The 10% workforce reduction and contract terminations are supposed to save $118 million next year, while it focuses on "lower power, emerging markets, and the cloud." Taking the cost savings and plugging those dollars into new initiatives sounds fine and dandy on paper, but in reality that's a tall order to fill, and I have doubts on AMD's ability to deliver.
An AMD sandwich
CPUs are the bulk of the company's sales, comprising more than three-quarters of revenue last quarter, with the remaining quarter coming from its Graphics segment. AMD's processor business is being squeezed from both sides, with Intel (Nasdaq: INTC) putting pressure on the high end and ARM Holdings (Nasdaq: ARMH) licensees like NVIDIA (Nasdaq: NVDA) and Qualcomm (Nasdaq: QCOM) flanking from below with low-power offerings.
For the longest time, it primarily butted heads with Intel in the x86 battleground for PCs, but AMD is trying to put that mentality in the rearview mirror. AMD spokesman Mike Silverman recently said, "We will all need to let go of the old 'AMD versus Intel' mindset, because it won't be about that anymore."
Source: AMD.com.
The recently launched Bulldozer architecture has failed to impress when pitted against Intel's Sandy Bridge. Intel is working on its Ivy Bridge and Haswell next-gen architectures, and the Haswell chips scheduled for 2013 boast up to a 30% reduction in power consumption compared with Sandy Bridge.
AMD ex-CEO Dirk Meyer was ditched for neglecting the mobile market, which is currently dominated by the ARM army. Concentrating on "low power" and "the cloud" sure sounds an awful lot like mobile if you ask me, but AMD is promising more details in a February strategic update.
In the meantime, AMD remains committed to its x86 architecture even as Microsoft (Nasdaq: MSFT) Windows on ARM promises to provide an inlet to the PC market for the ARMed forces.
Bigger fish
AMD also has a graphics business from its acquisition of ATI years ago and has since rebranded its Radeon and FirePro offerings under the AMD name. AMD had even won the almighty Apple (Nasdaq: AAPL) business from NVIDIA, but Cupertino is rumored to be switching back even after it went all-AMD briefly.
Source: Apple.com.
The segment's numbers also aren't worth calling home about. Last quarter's graphics operating income was just $12 million on revenue of $403 million, representing an operating margin of less than 3%. For the first three quarters of its fiscal 2011, graphics revenue has shrunk by 5% and graphics operating income has fallen 70%, when compared with the same period a year ago.
In a move announced just this week that has me scratching my head, AMD is introducing its own branded line of RAM memory modules. It's partnering with Patriot Memory and VisionTek, which really just means it will be using their sticks and slapping on an AMD-branded seal of approval after running some tests.
Source: AMD.com.
The memory market is mostly commoditized and plagued by oversaturation, and prices are at record lows. Positioning itself in the middle of an unattractive market to extract some value out of testing for compatibility seems like a misguided use of resources, considering it has bigger fish to fry right now.
Need more?
AMD has never really commanded leadership in its core PC processor market and has always walked in Intel's shadow. The company's CPU business is being pinched on both ends of the spectrum and has a lot of ground to cover if it hopes to become relevant in either direction. It trades design wins in the GPU market with NVIDIA, and that segment's overall results are uninspiring.
Just as I've recently given NVIDIA an outperform CAPScall largely because of its mobile strategy and new areas of growth, I'm giving AMD an underperform CAPScall for lacking one while its existing businesses are mostly flat at best. If you still need more reasons to say no to AMD, here are 10 more.
Add Advanced Micro Devices to your Watchlist to see whether my CAPScall turns out correct. The mobile revolution is going to be huge -- as in 12-digit huge -- so check out this 100% free report on the next trillion-dollar revolution and one company set to capitalize on it.
