Advanced Micro Devices (AMD) has seen its stock price decline by ~70% over the last year due to its falling market share in the declining PC and laptop processor market. AMD has been the biggest victim of Intel's (INTC) dominance of the PC and server processor market. AMD has always been the smaller player in the microprocessor market, with Intel playing the role of the big brother. Though AMD has managed to surprise Intel with technology advancements in the past, the company has never really posed a serious threat to Intel. The last year has been brutal for AMD as the market has punished the stock due to declining sales of PCs and laptops. AMD has tried to come up with a number of strategies to stem the decline. However, the stock has not stopped falling as there is a real fear that the company might go bankrupt due to liquidity issues. AMD has been racking up losses and negative cash flows in the past year. This has led to concerns that the company might not remain a going concern, especially since its main PC market is declining faster than expected. The company's stock touched an all time low ~$1.8 before recovering somewhat in 2013. The recent win in the game console market has given some hope to investors who are expecting the company to turnaround as it did in the past. AMD is also introducing new chip products for the tablet and PC markets which could help the company come out of its current morass. I feel that AMD offers a decent risk reward at the current stock price.
Why AMD is a buy
- Shift away from PC markets - AMD plans to increase the share of its total revenue from new product segments such as tablet SOCs, custom designed APUs and SeaMicro dense cloud server business. I like this change of focus as AMD will start entering markets which have lower competition than its traditional markets.
- Game console wins - AMD has managed to win the processor supply contracts for two major game console makers Sony (SNE) and Nintendo. AMD has invested heavily in providing semi-customized chips to this segment and that has resulted in these big wins for AMD. AMD has partnered with Nintendo since 2001; and the relationship continues to remain strong with custom-for-Nintendo AMD graphics processor, being made available for Nintendo's newly launched Wii U home console. Sony announced AMD would be powering the PS4 with an 8-core "Jaguar" CPU and Radeon GPU. The PS4 will be the next generation Sony game console which will be succeeding PS3. Microsoft's (MSFT) new Xbox 720 will also be powered by AMD, though a formal announcement has yet to be made. It is believed that the future Xbox will be powered by AMD Fusion SoC with eight x86 low-power/low-cost Jaguar cores, AMD Radeon HD graphics with GCN architecture as well as 8GB of DDR3 system memory. If MSFT uses AMD processors, then AMD would have captured the entire game console market giving it a steady stream of revenues for at least the next 5 years.
- New Products (Richland, Temash, Kabini and Kaveri) - AMD is soon going to launch new generation processors for major segments of the computing market. AMD does not have a material presence in the fast growing ultrabooks and tablet markets. However, the company's new Temash dual and quad core processors for the tablet market have received some good reviews. Temash is AMD's elite low-power mobility processor for Windows 8 tablets and hybrids. AMD expects Temash to have 100 percent more graphics processing performance than its predecessor (codenamed "Hondo.").
During the recent CES, AMD detailed out its product line-up -
AMD demonstrated working silicon of its first true system on chip (SoC) APUs, codenamed "Temash" and "Kabini," which will be the industry's first quad-core x86 SoCs. Both APUs are scheduled to ship in the first half of 2013. Demonstrations included a range of leading-edge applications and games on a "Kabini"-based ultrathin notebook and a "Temash"-based performance tablet and hybrid notebook. AMD also introduced the new APU codenamed "Richland" which is currently shipping to OEMs and delivers visual performance increases ranging from more than 20 percent to up to 40 percent over the previous generation of AMD A-Series APUs1. "Richland" is expected to come bundled with new software for consumers such as gesture- and facial-recognition to dramatically expand and enhance consumers' user experiences. The follow-on to "Richland" will be the 28nm APU codenamed "Kaveri" with revolutionary heterogeneous system architecture (HSA) features which is expected to begin shipping to customers in the second half of 2013. Additionally, AMD announced a new series of discrete graphics processors for performance gaming that are already shipping to OEMs, AMD Radeon™ HD 8000M Series graphics. These latest products are reflective of the company's strategy to focus on creating differentiated IP leadership through low-power technologies that target the high-growth client markets such as ultrathin, convertible and tablet.
4. Dense Servers - AMD purchased cloud micro server maker "SeaMicro" in 2012 for $334 million to enter this new fast growing server market. Dense servers connect a number of low power CPUs which reduces power and cost, without impacting the processing power. While SeaMicro's interconnect "Freedom Fabric" uses Intel's processors, AMD is working on shifting SeaMicro's products to use AMD's processors. AMD wants to target the cloud computing and big data markets with SeaMicro's servers. The company management wants micro servers to be one of the key pillars of AMD's restructured business in 2013 and beyond.
5. Gaming Push - AMD has lost to Nvidia (NVDA) in the discrete graphics chip markets in the last couple of years; NVDA has a ~65% market share compared to AMD's ~35% market share. However, AMD management has realized this weakness and is increasing its focus on selling discrete GPUs. One strategy that they have used with some success is partnering with major gaming companies. Under the "Never Settle" campaign, AMD is selling its graphics chips along with PC games in a bundle. In collaboration with Crystal Dynamics, it launched the most awaited PC game - Tomb Raider. AMD has partnered with Crytel to launch the Crysis 3 game.
Table 1: Total Graphics Chip Market shares
Shipment (M units) This quarter
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Last quarter (M units)
Market share last Qtr
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M Units a year ago
Market Share last yr.
6. Cost Reduction - AMD has sharply reduced costs in the preceding 5 years as it adjusted itself to a new normal of lower revenues. The management plans to further reduce costs by 25% from the early 2012 levels, by the 3rd quarter of 2013. The restructuring plan includes a 14% reduction of AMD's global workforce in the fourth quarter of 2012, and the first quarter of 2013 which will result in operational savings of $190 million in 2013. The company's capital expenditure will be ~$150 million this year compared to the ~$12-13 billion that will be spent by market leader Intel. The company has sold and leased back its Southwest Parkway facility to generate $164 million in cash. This will be used to bolster the company's balance sheet.
7. Valuation - AMD is quite cheap with a P/S 0.3x and a market capitalization of just $1.6 billion. This is at a steep discount to the industry average P/S of 2.2x and Intel's P/S at 1.1x. The total enterprise value of the company is ~$2.6 billion which makes it an easy acquisition target for a bigger technology company. I think that AMD offers a very good risk reward at the current valuation. The company has managed to come back from even deeper holes in the past and I think it has a decent probability of coming back even this time.
8. Acquisition target - AMD presents a good acquisition target for a number of big semiconductor players given the strength of its IP portfolio. AMD's x86 license will be worth a lot of money to the interested buyers. The company's graphics technology (ATI acquisition) will also be of interest to semiconductor players. Potential buyers could be big companies like Samsung, IBM (IBM) Apple (AAPL), Qualcomm (QCOM), Nvidia and Intel .
- Competition is much stronger - AMD faces a highly competitive landscape with its two principal competitors having a much greater market share in the PC and graphics processor markets. Intel and Nvidia also have much better balance sheets with lots of cash. Intel and Nvidia are also investing heavily to enter the newer faster growing tablet and ultrabook markets. Nvidia has already managed to win significant market share in the tablet SoC market, though it has faced some major customer losses recently. Asian companies like Mediatek and Spreadtrum have already established themselves as cheap, low cost warriors in the tablet and smartphone SoC market, while Qualcomm rules the roost with ~50% market share through its Snapdragon product. AMD will have a tough time establishing itself in the tablet market given the strength of the competition.
- Technology and Manufacturing Risk - Intel has managed to outspend the competition by establishing a huge technology and manufacturing lead in the last few years. Intel has 3 fabs running on the 22 nm process and will move to the 14 nm process by the end of this year. In comparison Global Foundries, TSMC and Samsung are still working on getting to the 20-22 nm process node. AMD does not manufacture chips on its own nowadays, instead outsources it to foundries like TSMC and Global Foundries. This puts AMD at a technology and manufacturing disadvantage over Intel. While the fabless mode allows AMD to run the company with a very low capex, the disadvantage is that the company may face supply constraints at leading edge nodes.
- Weak balance sheet and cash flows - AMD's cash position has deteriorated over the past 3-4 years, with the cash declining from ~$2.7 billion in 2009 to ~$1.02 billion currently. AMD saw an operating cash flow outflow of more than $1 billion last year, as the company's bread and butter PC segment showed large operating losses. AMD also has ~$2 billion in debt which means that the company has a net debt of ~$1 billion. The company cannot survive by showing more losses and needs to focus on cost reduction.
- Declining PC and laptop market - The PC and laptop market declined by 3% in 2012 and is expected to decline further in 2013. Though PC vendors are introducing new products such as ultrabooks and laptop-tablet hybrids, tablets are making further inroads in the overall computing market. AMD derives almost 2/3rds of its revenues from the "Computing" segment which sells microprocessors to the server and PC markets. This segment showed a huge 20% decline in FY12 as the company faced challenges from both market decline as well as market share loss. The "Graphics" segment performed relatively better but the revenues declined by 9% y/y.
AMD's stock has been one of the worst performing semiconductor stocks in the last year, losing ~70% of its value. Over the past 5 years, AMD stock has lost ~63% compared to the ~33% loss given by Nvidia and 4% loss given by Intel. The stock has gone down by 10% over the last month, as the market does not seem to be too confident about AMD's turnaround prospects. The company hit an all time low of $1.81 late last year before recovering to $2.7 this year.
AMD offers an alluring opportunity at this price and valuation. The company has been seriously hurt by the declining PC market in which it was always a minor player. A market share loss to Nvidia in the GPU segment has compounded its problems. However, I think AMD offers a good risk reward proposition given new product introductions and major wins in the game console space. The company is also rapidly reducing costs and focusing on higher growth markets. If the company manages to successfully navigate the turnaround this year, then the stock will be a multi-bagger. At the current stock price, the downside is limited given that the company has valuable IP in the form of x86 license and graphics technology. I would look to build a position in AMD given the weak sentiment, cheap valuation and a good potential for a turnaround.