Shares of American multinational semiconductor company Advanced Micro Devices (AMD +3.50%) fell more than 16% on July 17 after the company released worse-than-expected financial results. The company reported a loss of $36 million, or roughly $0.05 a share. This number is better than the $74 million loss reported a year earlier, but it wasn't enough to avoid disappointment among analysts.
In the past, it was easy to understand Advanced Micro Devices' inability to deliver strong results because of the company's direct exposure to the maturing PC industry. However, Intel (INTC +1.05%) recently delivered strong results, suggesting that the worst is over for the PC industry, and that Advanced Micro Devices' poor sales are mainly because the company's chips are unable to compete against Intel. Can Advanced Micro Devices make a turnaround?
Source: Advanced Micro Devices.
The global demand for PCs is stabilizing
The worst appears to be over for the PC industry. According to Gartner, PC shipments were up 0.1% year on year for the last quarter, the first annual increase since 2011. This is consistent with Intel's recent earnings report.
Intel, which still generates 63% of its revenue from its PC segment, saw its top line grow 8% year over year. And its earnings per share increased an amazing 41% versus the same period one year ago because of a huge improvement in gross margin.
AMD's failure to benefit from PC recovery
Despite the recent stabilization in the global demand for PCs, Advanced Micro Devices reported a 20% drop in PC chip shipments year over year, and just a 1% sequential increase in the most recent quarter.
According to Reuters, much of the recent stabilization in the PC market has been driven by businesses replacing old PCs. This trend is more beneficial to Intel, as Advanced Micro Devices has limited exposure to business customers. Only a recovery in the consumer PC segment could help Advanced Micro Devices to increase its top line, but it's difficult to make this happen in the short term.
Intel's upcoming release of its 14-nanometer Broadwell and Braswell products will likely make things harder for AMD. It has been widely rumored that Broadwell will pump up the performance of a graphic processing unit by 40% over its predecessor, Intel's Haswell, which itself has a powerful GPU side.
From now on
But it's not all bad news for Advanced Micro Devices. On the technical side, to compete against Intel's high power efficiency, the company needs to increase its research and development R&D budget. Luckily, management has done a fairly good job in strengthening the company's balance sheet in the past few quarters, and we may now see an increase in R&D going forward.
The company also continues to make steady progress in diversifying its products in order to reduce its PC exposure. For example, the company's graphic and visual solutions business division has now become a major growth driver. In the most recent quarter, the division's revenue grew by 141% to $772 million on the back of strong console chip sales. This number is likely going to increase in the next quarter, as the company may supply chips for Nintendo's upcoming portable device.
Finally, on the server side, the release of Advanced Micro Devices' ARM based 64-bit server processor, named Seattle, will likely bring in new business. The chip appears to be on track for a release in the fourth quarter of this year.
Final Foolish takeaway
Unlike Intel, Advanced Micro Devices did not benefit from the stabilization trend seen in the global demand for PCs. This is probably because much of the PC recovery is taking place in the business PC segment, where Advanced Micro Devices has limited exposure. However, it's not all bad news for the company. The company's console chips are selling well, and it may even supply chips to Nintendo's new portable console. It has a stronger balance sheet, which could lead to an increase in R&D budget. Finally, its Seattle server processor could bring in new business in the last quarter of this year.
