Fellow Fool Leo Sun recently published a write-up discussing why chipmaker Advanced Micro Devices (NASDAQ:AMD) is not actively targeting the market for Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Chromebooks. Leo pointed to a quote from an AMD executive, who reportedly said that Chromebooks are a "rock-bottom market" with unattractive margins.
This might be true for AMD, but in my view, it has very little to do with anything inherent to the Chromebook market itself. AMD's apparent inability to compete for good margins in the Chromebook market seems to be a company-specific problem. Allow me to explain.
Intel is making bank from Chromebooks at good margins
Over the past several years, AMD's gross profit margins have plunged. In the last 12 months, the gross profit margin percentage came out to just 33.4%, down from the low 40% range the company had enjoyed in years past. This performance stands in stark contrast to rival Intel(NASDAQ:INTC), which has seen gross profit margins of over 63% during the same period.
Although one could rightfully attribute those very high gross profit margins to its data-center chips, note that last year, the Intel PC Client Group recorded an operating margin of over 42%. That means gross profit margins for that division, since Intel spends heavily on research and development, were significantly above that level.
Yet Intel sells lots of chips into Chromebooks and Chromebook-class laptops.
Low-cost does not always mean low-margin
There is a fundamental concept that investors need to understand: Low prices do not necessarily mean low margins. The gross profit margin percentage does not just depend on the selling prices of its products but the costs to manufacture those products as well.
For example, if I sell a chip for $1.00, but it costs me just $0.30 to manufacture it, then my gross profit margin percentage on that chip is a very respectable 70%. Conversely, if I sell a chip for $1,000, but it costs me $750 to manufacture it, then my gross profit margin percentage on that chip is just 25%.
Where I think the confusion comes from is that low-cost chips, even with high per-chip gross profit margin percentages, do not generate as much in gross profit dollars per unit. However, that is why it is always important to factor volume into the equation to get a picture of the total gross profit.
With that out of the way, let's get back to AMD, Intel, and Chromebooks.
Intel margins on Chromebooks are quite high
The chips that Intel typically sells into Chromebooks are either very feature-reduced Core processors sold under the "Pentium" and "Celeron" brands, or they are Atom-derived chips sold under those same brands.
Now, Intel has said that the majority of its Pentium and Celeron chips have been moved to the Atom architecture, because this lowers the company cost structure for said chips. Furthermore, Intel has indicated that over 20% of all of the chips it sells into laptop PCs are based on the Atom architecture.
So why is Intel able to make good money selling low-cost PC chips?
It is about cost structure, and potentially competitiveness
I believe the real reason AMD does not want to take Intel on in devices such as Chromebooks is that it simply does not have the cost structure to compete. Intel just announced that it is shipping low-cost, low-power chips known as Braswell for the low-cost PC market based on its 14-nanometer technology.
AMD's Carrizo-L, which is expected to compete with Braswell, is also expected to ship in the first half of 2015. However, there are a couple of things worth noting. Not only does AMD need to pay an external chip manufacturer to build its products (putting it at a disadvantage to Intel right off the bat), but AMD's chips also do not seem to target the same power envelope.
For some context, Carrizo-L, according to the AMD website, is targeted at a 10 to 25-watt power envelope. Braswell, on the other hand, targets a 6-watt "thermal design power" and a 4-watt "scenario design power." These chips are not even close to the same league in terms of power consumption.
That means low-cost Braswell chips can be used to power cheap, fanless Chromebooks. I am not convinced that the current AMD product lineup is well suited to address this opportunity.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.