The technology sector is one of the most volatile sectors of the economy with trends changing rapidly. Advanced Micro Devices (NYSE:AMD), operating in the semiconductor industry is subject to similar trends. The company provides processing solutions for both commercial and consumer markets. Recently, the industry underwent a shift in demand as the number of PC users declined. AMD has taken measures to mitigate losses by revamping its business model.
The previous year was not very successful for the company. AMD reported a decline in revenues of 17.5% while net earnings showed a massive loss of 340% as earnings turned into losses within a year. One of the main reasons for such a massive change in net income was a shift in the industry trend as the number of PC users declined sharply. AMD supplies microprocessors for PCs thus the aforementioned trend was a deathblow to its core source of revenues.
In 2011, around 95% of the revenues were attributed to the growth in PC users. However, the management via its restructuring program plans to cut down the figure to 80% within a year. Unfortunately the cost figures remain stagnant explaining the large revenue gap. EPS also decreased by a three digit figure of 342% to a total of -$1.6 last year.
The asset base of the company showed a decline of a 19.3% caused by a decrease in its liquid assets. AMD reallocated its asset portfolio by moving its short-term marketable securities to long-term as interest rates hit rock bottom. The company increased its long-term debt by 33.3% arriving at a high leverage ratio of 4.9 whilst the industry average remained at 0.3
Given the nature of the industry it is no surprise that AMD faces strong competition from various businesses in each segment. The company faces competition in each segment contending on product quality, power consumption and efficiency. In the microprocessors category the company faces cut throat competition from Intel (NASDAQ:INTC). Intel relies on its integrated synergies, financial flexibility and product diversification to arrive at unprecedented production costs. AMD however, still maintains a strategic position in this segment. In the chipset market, AMD faces threats from suppliers of integrated chipsets and again Intel is a known market player.
Lastly, in the graphics market, the corporation faces competition from Intel, Nvidia (NASDAQ:NVDA) and some other smaller suppliers. It competes directly against Nvidia in the discrete graphics category. Overall, the company operates in a highly competitive environment constantly innovating to keep with the market leaders. The company recently undertook measures by decreasing its marketing and administrative expenses 17% in 2012 thus making it more vulnerable to competition.
As mentioned earlier, the management took radical steps to return to profitability. The current year will likely put the company back on the path of recovery as the much needed changes in its operational structure begin to payoff. The PC market is expected to stabilize however; demand for PC devices is projected to be weak. The restructuring program undertaken in the last quarter of 2012 involves the measures to reduce costs whilst taking advantage of high growth opportunities by expanding its product portfolio.
Dense server, ultra low-power client, embedded and semi-custom solutions are some examples of the relatively untapped market which AMD seeks to exploit. Recently, AMD launched two chips with better speed and battery life namely Kaibini and Richland. The decision to invest in the chip industry is based on estimated growth of about 20% for the coming year. The pricing of the new products remain within a competitive range. Furthermore, the company expanded its graphics operations and entered the cloud computing market.
The release of Windows 8.1 is expected to increase its revenues as it is more AMD product-friendly. Microsoft's (NASDAQ:MSFT) support in the company's operations presents itself as a major strength for AMD as an industry player. Also, it was able to achieve its expansion plans without incurring any increase in research and development expenditures. Thus, keeping all the future growth prospects in mind the management expects the revenues for the next quarter to increase by 2%.
In my opinion AMD can prove to be a stock with immense growth potential. The forward P/E ratio of the corporation is projected to touch 55 as per Morningstar estimates. The increase in price is contingent upon the benefits derived from the new growth model. AMD did not hesitate to adjust to the changing trends that will work to its advantage. However, the risks associated with the downfall in PC users and increased competition from Intel can adversely affect its future earnings. More specific risks would include the high leverage ratio and its decision to reallocate funds towards long term market securities. All in all, AMD is certainly a stock to watch out for.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.