Over the last year, Advanced Micro Devices (AMD) has repeatedly disappointed investors. Whether it was two consecutive quarters of revenue misses, inventory write downs, or making bold claims that ultimately turn out to be nothing but fluff, investors have had a pretty tough time holding AMD shares.
The problem is that AMD is bleeding market share in the (already in trouble) PC space. ASPs and market share have all but evaporated in the server space, and the PC space is being hit by a double-whammy of market share loss as well as weakness in the space.
Now, the current management, I am happy to say, seems to actually have a good dose of common sense and is playing to their strengths in areas that don't necessarily involve bumping heads with Intel (INTC). In particular, it seems that AMD has scored all of the next generation game console design wins. On 2/20, Sony (SNE) announced its PlayStation 4 game console, which features both a next-generation AMD CPU (based on the low power "Jaguar" processor cores) as well as a PC-class (likely somewhere between Radeon 7850 and 7870) graphics card. This could actually be a big deal for AMD.
AMD Probably Isn't Just Supplying IP...
Due to the nature of AMD and Intel's X86 cross-license, AMD is likely not just handing over blueprints to Sony (and probably Microsoft (MSFT) for its next console) but is selling the parts themselves. While the console vendors are likely to squeeze the hardware suppliers on the margin side, AMD isn't exactly going to turn down a very high volume deal, especially with the Wafer Supply Agreement that it has in place that results in take-or-pay charges should AMD order less than the contractual obligation.
On the graphics side, AMD may be providing IP rather than the actual chips, but assuming that AMD is also supplying the chips, and given that we know that the GPU is Radeon 7850 - Radeon 7870 class, we could be looking at nontrivial revenue from the GPU.
For some back-of-the-envelope math, let's assume that each CPU fetches $20/unit in revenue, and then let's further assume that the GPU brings in about $60/unit (going price for a Radeon 7850 these days is $200, but that includes PCB, RAM, board vendor markup, retail markup, and comparatively lower volumes). Per console, AMD could be taking in around ~$80. The lifetime shipments of the Xbox 360 and the Playstation 3 combined came out to ~150M units. Assuming that AMD wins both boxes, and further assuming similar volumes, this could mean revenue of $12B over the next 7 years, or a run rate of about $1.7B/yr.
Now this is an incredibly crude estimate as component prices will come down significantly over the life of the designs, but it is clear that even at 30% gross margin, there is a very real opportunity for AMD to try to make up for the share losses that it's currently seeing in its other operating segments.
The game console wins are a solid PR victory for the company, and it is likely that, if AMD is shipping chips rather than simply collecting licensing fees on the designs, this could be the shot in the arm that the company needs to offset its deteriorating PC and server businesses. While I still think that AMD's challenges are quite deep, and while I further want to understand just why AMD's management believes it will be cash flow positive by 2H 2013, it seems that high volume console wins could be a stepping stone to that. Investing in AMD still isn't going to be easy, but victories like this could at the very least improve the sentiment surrounding the stock, which is what shareholders need more than anything right now.