Advanced Micro Devices - A Company That Is On The Edge

Aug.28.13 | About: Advanced Micro (AMD)

Advanced Micro Devices Inc. (NASDAQ:AMD) develops and markets semiconductors for computers and gaming providers. The company has a market cap of $2.4 billion, and its stock price is around $3.40.

Over the course of the last year, AMD has seen its earnings crash. In the last four quarters, the company has lost $850 million. The second quarter earnings announcement was on July 18th. The company reported revenues of $1.61 billion which was a 21% decrease from the second quarter of 2012. Net income was $-74 million which was a decrease of $107 million on a year over year basis. While the second quarter earnings results were dreary, the good news was that they were markedly better than the prior three quarters, were the average net income was $-258.6 million. During the second quarter earnings call, AMD's CEO Rory P. Read spoke positively about AMD"s future. He said "Our focus on restructuring and transforming AMD resulted in improved financial results," noting that AMD "expects significant revenue growth and a return to profitability in the third quarter."

Mr. Read's prediction that the company will be profitable in the third quarter was a pretty bold statement, and one that he will be held accountable for. Mr. Read took over as the head of AMD on August 1, 2011 and so far he has been unable to come up with a winning strategy for the company. To be fair, he was caught in the same dilemma that other companies whose revenues were largely dependent on PC sales, like Dell (NASDAQ:DELL), Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT) were caught in. When PC sales plummeted because of the rise of mobile computers their revenues and earnings suffered. Each of these companies, needed to adapt to the trend towards mobile computing and then restructure themselves accordingly.

What is in AMD's Future

While most of the other PC dependent companies have either developed smartphones, or products that could be used in smartphones or tablet computers, AMD turned their sights towards developing Graphics and Visual Solutions. In fact, their Graphics unit was renamed Graphics and Visual Solutions.

One of the reasons that Mr. Read was confident enough to predict that the company would return to profitability in the third quarter was that it had contracts to supply chips for the Wii U game unit, along with Sony for PlayStation 4 and Microsoft for Xbox One. Getting these three contracts was an incredible victory for AMD and it puts them at the top of the gaming chip providers.

AMD's victories were great, but the company needs to do more. While providing gaming chips will be a big boost to the company's bottom line, it could be just temporary. The popularity of gaming consoles can be short-lived, and that means that the company needs other sources of revenue. The company has struggled in the PC business where Intel has an 85% market share. On the mobile front, Qualcomm (NASDAQ:QCOM) is the dominant provider and controls the microprocessor market. That is probably why AMD has been trying to make inroads in the business of developing and marketing servers. In March of 2012 AMD purchased SeaMicro for $334 million. SeaMicro is a company whose specialty is micro servers, and after the purchase it became AMD's Data Center Server Solution unit. Lisa Su the senior vice president and general manager of AMD's Global Business Unit said, "The combination of this innovative technology with our processor design expertise greatly enhances our ability to attack the fastest growing portion of the server market with industry-leading low-power, low-cost, high-bandwidth solutions."

Conclusion

In November of 2012 investors were treating AMD as if it were doomed to go bankrupt. After all, the company was about to report a fourth quarter loss of $-473 million and had a balance sheet that showed $1.3 billion in cash and $2.03 billion in debt. The orders that AMD got for gaming chips, and its move into the server business helped to move its stock price off of its November 16, 2012 low of $1.81 per share. However, the company still has a long way to go in its efforts to turn things around.

I look at AMD as a turnaround story with a lot of problems to overcome. The company has a massive debt load, shrinking revenues and a serious cash flow problem. In addition, AMD's plan to increase revenues is being threatened by lower than hoped for demand for the Wii U, Xbox One and PlayStation 4.

AMD's stock price hit a 52 week high of $4.65 on July 18th after Mr. Read's announced that the company would turn a profit in the third quarter. However since that time, investors have had time to consider AMD's situation, and the stock price has fallen by more than 35%. AMD is a company that is on the edge, if Mr. Read is right about its third quarter earnings, AMD's stock price could take off, if he is wrong the stock price will tank. AMD is a speculative stock, and I would not recommend buying it until after I see its third quarter earnings results.

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

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.