AMD: Rain Or Shine?

| About: Advanced Micro (AMD)

It's funny sometimes how experts and analysts can look at the same company data and reach entirely different conclusions. Kind of like weather forecasters.

So what are the experts forecasting for Advanced Micro Devices (NYSE:AMD), a company that manufactures semiconductors and was once a major rival to Intel (NASDAQ:INTC)? Some look at the company's data and see sunshine in the future, while others see little chance that the dark clouds currently hanging over will break anytime soon.

The company's analysts are split down the middle. Five have buy or strong buy ratings, four have underperform ratings and the remaining 20 rate it as a hold.

Falling Market Share

It wasn't long ago that AMD was a formidable challenger to Intel's dominance in the microprocessor market. Some would say that given the decline of the traditional personal computer, winning the microprocessor market is like being the industry leader in the buggywhip or typewriter market.

So in 2006, AMD joined the graphics processing unit business with the acquisition of ATI Technologies for $5.6 billion, where it ran into a dominant firm in Nvidia (NASDAQ:NVDA), which essentially created the GPU market. A graphics processing unit is a single-chip processor that creates lighting effects and transforms objects every time a 3D scene is redrawn. It is used in gaming and mobile applications, among many others.

So how is the acquisition of ATI working seven years later? In the first quarter of 2013, AMD's graphic card market share actually fell, though slightly, from 36.3% to 35.7%.

Also during the last seven years, AMD's market share in the CPU market has gone from 48%, almost equal that of Intel's, to a minuscule 16.7% in the first quarter of 2013. During the same period, Intel's market share has risen from 51% to 83%. Throw in the fact that PC shipments had one of their worst declines ever in the first quarter of 2013 -- 13.9% according to IDC -- and that computer processors still comprise 69% of AMD's sales, and it gives some analysts plenty of reason to pass on its stock.

And it's not a good sign when, seven years after spending $5.6 billion on a company in hopes of growing in a new segment, that AMD's total market capitalization today is about $1.8 billion.

A Company in Decline

Over the last five years, the company has averaged annual negative returns on investments (-16.4%) and assets (-9.9%) and has average negative profit margins of -10.2%.

Shares of AMD have been on a steady decline since hitting a 52-week high of $7.72 in early May 2012, bottoming out at $1.81 near the end of 2012. Shares are currently trading in the $2.60 to $2.70 range.

The company announced its first quarter 2013 earnings on April 18. AMD booked revenue of $1.09 billion, down from $1.59 billion in the first quarter of 2012. The quarter resulted in a net loss on a GAAP basis of $146 million, or $0.19 a share, compared with a $590 million loss, or $0.80 a share, in the previous year's first quarter. Excluding restructuring and other charges, AMD's non-GAAP net loss was $94 million, or $0.13 a share, compared to net income of $92 million, or earnings per share of $0.12, in the first quarter of 2012.

The company's balance and income sheets also don't portend to a pleasant forecast. The company has about $1 billion in cash, but twice as much debt. And in an industry when research and development spending is critical, how much longer can AMD spend $1.35 billion annually on R&D, as it did in 2012, when it is booking net losses and burning through cash?

A Few Positive Signs

So given all that, how can some be optimistic? In one word: gaming.

AMD has recently entered the chip market for game consoles to reduce its reliance on the declining personal computer market. Two of the most anticipated new consoles in recent years, the Sony PlayStation 4 and Microsoft's new Xbox, will feature AMD processors. According to management, the game console industry is expected to ship more than 40 million game consoles in 2013.

Those who have put away their umbrellas also point to the fact that, even though the company lost $0.13 a share for the quarter, the loss was less than the $0.18 consensus estimate.

Other positive signs included a significant increase in gross margin from 15.4% in the fourth quarter of 2012 to 41% in the first quarter of 2013. Operating expenses decreased 18% year-over-year in the first quarter.

The company expects second quarter 2013 revenues to increase 2%, with gross margins of 39% and operating expenses of $480 million, which would be down from $491 million in the first quarter of 2013.

Another reason for optimism is that the company has laid out a detailed plan to turn things around. It is divided into three steps: Restructure and reduce operating costs; execute on its product roadmap; and return to profitability and expand into new markets once its core position has been re-established.

The company said step 1 is largely completed. It recently announced another part of that plan by vowing to reduce its reliance on the CPU market. It says that within three years, as much as half of its sales will come from processors destined for game consoles, ultra low-power processors for tablets and other non-PC applications.

But will that be enough? Those predicting rain point to lackluster sales so far for the Nintendo Wii U, which is equipped with AMD processors. Like the PC before, the traditional gaming console market may be giving way to gaming on smartphones and tablets, and the emerging technology of cloud gaming, on which its rival Nvidia is betting heavily. Some speculate that cloud gaming could render the home game console obsolete.

In the end, a plan is simply a list of intentions. Without the right execution, those intentions may never materialize, and investors may never benefit.

Given how the company has performed the last several years, many do not have faith in the current plan and will prepare for a storm regardless of the forecast.

Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.

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Tagged: , Semiconductor - Broad Line
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