Advanced Micro Devices (NASDAQ:AMD) looks a lot more stable than it did a year ago, and its recent earnings report paints a picture of a company that has weathered the storm. Strong sales of the game consoles have given AMD a revenue boost, and operating profit has been positive for the last two quarters.

It seems that a turnaround is occurring, but let's be careful -- AMD is a very different company than it was back when its market capitalization was five times what it is today. Investing in AMD requires a big leap of faith, and faith investing is generally not a good strategy.

A changing focus
AMD was once solely focused on the PC, competing against Intel (NASDAQ:INTC) in CPUs and NVIDIA in GPUs. AMD has fallen behind both, with the company claiming just 17% of the x86 processor market, buoyed recently by the launch of the Playstation 4/ Xbox One, and around 35% of the discrete GPU market.

Intel has traditionally ignored the low-end of the CPU market, instead focusing on higher-margin parts. But the decline of the PC market and the rise of mobile devices has led Intel to invest heavily in low-power chips. Now Intel's Atom line of processors, which are showing up in 2-in-1s, hybrid devices, tablets, and Chromebooks, threatens AMD's low-end CPU business. AMD's processors do have better graphics compared to Intel, but I'm not convinced that graphics matter all that much at the low-end of the market.

AMD's CPU business is basically breaking even, an improvement over the past few years, but revenue has been declining and will continue to decline as the PC market shrinks. Intel's recent results suggest that PC sales are beginning to stabilize, with unit volumes up 1% year over year, but this could also mean that Intel is stealing market share from AMD. Gartner puts the decline in PC shipments in the first quarter at 1.7%, and with Intel increasing unit volumes, this leads me to believe that AMD is falling even further behind.

What AMD is left with is a CPU business that is unlikely to generate meaningful profits. The company's new plan is to focus on high-growth areas, including semi-custom products and dense servers. This plan is what has been driving all the turnaround talk, and indeed, shifting focus away from markets in which AMD can't effectively compete sounds like a good idea. But at this point, all AMD has is a plan, and all investors have is the hope that AMD can deliver.

The game consoles mark the start of AMD's semi-custom business, where the company designs components for specific clients. Revenue in the graphics and visual solutions segment more than doubled year over year, driven by the stellar sales of the game consoles as well as an increase in GPU sales. AMD expects to win one or two new semi-custom deals this year, but with the consoles being the only semi-custom products so far, it's hard to gauge exactly how big the opportunity is. We won't know more until AMD announces more design wins, so at this point, it's up in the air how much the semi-custom segment will ultimately contribute to the bottom line.

Dense servers are another area that AMD is focusing on, and the company is betting on its upcoming ARM-based 64-bit server processors to win market share from Intel. There's a lot of hype around ARM-based servers disrupting the server industry, which Intel dominates, but wrestling away market share from Intel will be a struggle. As fellow Fool Ashraf Eassa has pointed out, Intel's low-end Atom server processors will be difficult to beat from a performance-per-watt perspective, and AMD needs more than buzzwords to regain server market share.

The bottom line
AMD has a plan to return to profitability, but with the semi-custom business only comprised of the game consoles and dense servers depending on the success of ARM Holdings-based servers, we have yet to see much in the way of execution. AMD is still losing money, with a $20 million loss in the first quarter, partly because of the roughly $170 million it pays annually in interest. 

So while AMD is in better shape now than it was a few years ago, calling the turnaround a success is premature. AMD could very well succeed brilliantly from here, and if so, the stock looks like a bargain. But the odds are still against AMD, and it seems likely that AMD will not be able to reinvent itself.