AMD: A Positive Turnaround Play

| About: Advanced Micro (AMD)

Advanced Micro Devices (NYSE:AMD) has been caught in the middle of a chip competition in which Intel (NASDAQ:INTC) is the supercomputer leader while Qualcomm (NASDAQ:QCOM) is winning at the lower end mobile device market. AMD is taking measures to innovate and appears to be in improving fundamentals as the once high flying stock remains in the low single digits. AMD is still a viable semiconductor company but is currently in turnaround mode. The company has gotten back to profitability by cutting costs and is riding on the cutting edge of new development tools for servers.

A Low Flying Stock

AMD stock had a brief run six years ago in which it traded higher than Intel above $40 per share but sank following big expenses that pressured its balance sheet. The company currently has a market cap of $2 billion compared with Intel's market cap of $120 billion. In 2013, it appeared the stock was on the road to recovery, doubling from $2 per share but in mid November slid below $3.50 as the $4 tests did not stick very long. The consensus sentiment among analysts, according to Thomson/First Call, is hold.

Mixed Signals

Part of AMD's problem is that a majority of the chipmaker's market share is at the low end market, in which Intel is now sharpening its focus. Intel's new CEO feels the company fell behind by not paying attention to the exploding popularity of smartphones and tablets while PC sales are dying. AMD also put too much emphasis on PC chips and its outlook for 2014 PC sales looks weak. During 2013, AMD has had success with Kabini notebooks but has failed with Temash tablets. Nevertheless, CEO Rory Read's new strategy is to be less dependent on the unreliable PC market.

While the company has tried to design more efficient chips, Intel is winning the battle at performance per watt chips for the low end and the high end, thanks to superior transistor technology. A noticeable bright spot, however, is that AMD's Jaguar cores are used in Xbox One as well as PlayStation 4, which are both expected to sell millions of units this holiday season. The Wall Street Journal, however, recently published an unflattering piece called "Console Bet Played Out At AMD," which seems unfair when you consider that only the new PS4 had been shipped at that point.

New Designs

AMD announced in November that it has designed a new graphics card for super computers. The FirePro S10000 12 GB Edition GPU will be released in Spring 2014 and targets industries such as defense, aeronautics, medicine, finance, oil and automotive. The graphics card provides more memory and 3D features for large scale projects. A 6 GB version of the graphics card is currently available. One of AMD's better known innovations for the tech community has been Accelerated Processing Units (APUs), which merge computing and graphics on shared silicon. This technology was showcased recently at the APU13 Developer Summit.

AMD introduced this new concept three years ago, eclipsing Intel to the degree that it has attracted attention from other tech companies as a collaborative effort that targets software developers. Its CPU is derived from the x86 standard while the GPU came from its acquisition of ATI, resulting in the development of parallel computing. The design is playing a part in pioneering new technology known as Heterogeneous Systems Architecture (NYSE:HSA) in which AMD has taken the lead, making servers more efficient, scalable and adaptable.

Rebuilding Fundamentals

Advanced Micro Devices announced a $500 million loan over five years in November 2013, in which proceeds will be used partly for working capital. The company's Q3 earnings report released in October 2013 marked returning to profitability. Revenue jumped 15 percent to $1.46 billion year over year from $1.27 billion. Net income also improved from a loss of $157 million to a profit of $48 million.

One of the key metrics for the semiconductor sector is gross margin, in which AMD advanced from 30.9 to 35.7 percent. The company's computing solutions business, driven by PC sales, declined 15 percent. Perhaps the most exciting metric of the quarter was AMD's graphics and visual solutions unit, in which revenue grew 200 percent to $671 million. So even though the company is barely profitable, it's seeing a positive turnaround driven by new innovation, which is a good sign for a company that had become lost until this past year.

Conclusion

The stock appears to be following a positive path of turnaround efforts. In the last two years the stock has ranged between $2 and $8. Its $3.35 price is ripe for gains, due to its innovation that has brought tech partners together, which could be a game changer in the high end server market. The company's cash flow is decent while earnings are getting better.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.