Shares of AMD (NASDAQ:AMD) have fallen 20% over the past 12 months, as shares of top rivals Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA) respectively rose 36% and 24%. In previous articles, I discussed AMD's strengths and weaknesses. Today, we'll weigh them against each other to see if AMD is worth buying.
What AMD's valuations tell us
Since AMD isn't profitable, it doesn't have a trailing P/E to compare against Intel and Nvidia. However, AMD is valued at 33 times forward earnings, assuming it can earn $0.09 per share in profit (as forecast by Thomson Reuters) by the end of 2016. By comparison, Intel and Nvidia respectively trade at 13 and 17 times forward earnings.
Over the past few years, former CEO Rory Read reduced AMD's operating expenses, maintained the company's cash at a constant level near $1 billion, and made sure no new debt comes due until 2019. Yet that thrifty strategy, combined with AMD's negative free cash flow of $193 million over the past 12 months, makes it tough for the company to mount any effective marketing blitzes against Intel and NVIDIA.
AMD's greatest asset is its enterprise, embedded, and semi-custom segment, which accounted for 43% of its top line last year. The business's revenue and operating income respectively rose 51% and 35% year over year in 2014, thanks to robust demand for Microsoft's Xbox One and Sony's PlayStation 4, which are both powered by AMD system on chips, or SoCs.
To date, 11.5 million Xbox Ones and 19.4 million PS4s have been sold, according to market tracking site VGChartz. Considering that Microsoft and Sony both previously sold about 85 million Xbox 360s and PS3s, AMD's console SoCs could keep contributing to its top line for years to come. Nintendo's next console will reportedly use an AMD SoC as well.
The segment also houses AMD's Opteron processors, which are used to power "microservers." Microservers are smaller, cheaper, and less powerful servers that usually only perform a single function, such as loading the background images on a webpage. Smaller companies prefer buying microservers in clusters, because it allows them to only buy the processing power they need. By comparison, big traditional servers -- powered mainly by Intel's Xeon processors -- are expensive "jacks of all trades" that are often too powerful for small-to-medium-sized businesses.
Microservers could account for over 10% of the entire server market by 2016, up from just 0.2% in 2011, according to IDC. AMD must compete with Intel's Atom and ARM-based CPUs in this market, but it's still a promising new way for the company to generate fresh revenue.
However, AMD's computing and graphics segment, which accounted for 57% of its top line last year, is faring much worse. The segment's revenue fell 16% year over year in 2014 as its operating loss widened from $91 million to $478 million. That loss completely erased the $399 million in operating income generated by the enterprise, embedded, and semi-custom business. The problem is that the segment is being crushed by Intel in x86 CPUs and by NVIDIA in high-end graphics cards, also known as AIBs (add-in boards).
Intel dominates the PC and server markets while selling pricier chips, which puts AMD in the unenviable position of selling fewer chips at cheaper prices. Meanwhile, Intel has its own foundry, which it uses to manufacture new 14-nanometer chips including the fanless Broadwell CPUs.
AMD's chips are manufactured by GlobalFoundries, which was spun off from AMD's manufacturing facilities. GlobalFoundries said it will only start manufacturing 14nm chips in the "first half of 2015". As a result, AMD's road map remains focused on its 28nm Carrizo chips, and it probably won't launch 14nm chips until 2016.
As for graphics cards, AMD has steadily fallen behind market leader NVIDIA. According to research firm JPR, AMD's global AIB market share fell from 35% to 24% between the fourth quarters of 2013 and 2014, while Nvidia's share rose from 65% to 76%.
AMD has been trying to undercut NVIDIA on pricing instead. Yet lowering the average selling price hasn't helped AMD gain much ground against its rival. In the fourth quarter of 2014, JPR reported that AMD's overall PC graphics shipments declined 7% year over year as NVIDIA's rose 2.9%. AMD finished the quarter with 13.6% share of the entire GPU market, compared to NVIDIA's 15%. Intel, with its integrated graphics chips, accounted for the remainder of the market.
In the end, AMD's weaknesses offset its strengths. Its lack of profitability and inability to turn around its computing and graphics segment overshadow the notable strengths of its enterprise, embedded, and semi-custom business. A few wild cards -- such as the recent management shake-up and buyout possibilities -- might attract some contrarian investors, but AMD still has much to prove before it can be considered a stable investment.