Seeking Alpha
Equity Flux, Equity Flux (654 clicks)
Long only, special situations, momentum, value
Profile| Send Message| ()  

Advanced Micro Devices (AMD) is currently in the process of executing its strategy of diverging from the PC industry into the gaming, micro server and cloud computing. Sluggish PC market growth and dominance of Intel were the main reasons behind this move. AMD competes with Intel in processing chip manufacturing and with Nvidia (NVDA) in graphics solutions. AMD's accelerated processor units (APUs) were recently featured in the Xbox One and PlayStation 4 consoles. We will analyze their anticipated impact on the revenues of AMD in the future and any other developments relating to the consoles featuring AMD's gear.

Console Launch 2013

Microsoft (MSFT) launched its new console, Xbox One, in the second half of November. According to company sources, it sold over 1 million console units on the launch day. Sony (SNE) staged its console launch just a week before Microsoft's. The PlayStation 4 also sold around 1 million units in 24 hours. Both companies are optimistic about selling 3 million units each. That means, 6 million APUs from AMD. IHS projects the combined sales of the consoles to reach 4 million units. Both consoles are equipped with 8 core Jaguar Architecture CPUs embedded with the 1.84 TFlop Radeon GPU. AMD is generating $100 for its APUs on every unit sale of a console. A tear down estimate of costs by TechInsights reveals the total cost of PS4 and Xbox One to be $332 and $331 respectively, of which $132 and $121 is attributed to the APU.


(Click to enlarge)

So, a prudent estimate predicts around $400 million in revenues for AMD from console sales. A broad estimate is that AMD will generate revenues between $400-750 million by the end of 2013.

Estimates

Price/unit

Anticipated sales(m)

Anticipated Revenue

Amounts in millions except per unit price

High

$125

6

750

Low

$100

4

400

The high estimate is based on TechInsights' cost estimate of APUs and the anticipated sales target by Sony and Microsoft. It would be safe to assume that the company will generate around $500 million in revenues by the end of 2013. Sales of AMD are anticipated to be $5 billion in 2013 and console sales will make up around 10% of the total sales of the company. This does not seem to be a significant proportion but the point to be noted here is that this revenue will help the company in offsetting the net loss and rebounding towards profitability. It has already started to reflect in the net income (TTM), which reduced to around $400 million as compared to the net loss of around $1 billion in the fiscal year 2012. There are more console sales to come in the year 2014. Overall, the console sales will help AMD return toward profitability in the near future.

Recent Developments

AMD has recently been selected for a research project associated with the U.S. Department of Energy. The research will focus on interconnected architectures and technologies needed to support data transfer capabilities in extreme-scale computing environments."This award will enable AMD to continue important research to help realize the enormous potential of extreme-scale computing," said Alan Lee, AMD corporate vice president of Research and Advanced Development. AMD will receive $3.1 million for this research. The grant is not the key point here; it is the activity that is important. By indulging in research, AMD will develop new technologies that will help the company survive in the coming future. It would enable the company to develop more power-efficient chips, which was always a problem for AMD as Intel has been outperforming the company in this department.

AMD is also planning to launch the first supercomputing server graphics card with 12GB memory. This development further enhances the position of AMD in the graphics industry. FirePro™ S10000 is designed for big-data and high performance computing. The card will be available for purchase in 2014. This card will probably penetrate across industries and will serve super computing requirements. The 6GB version of this card, currently available, is slightly better in terms of specification when compared to its counterpart Nvidia's GeForce GTX Titan Ultra. It outperforms Titan in terms of core speed and pixel rate. Ultra is better in terms of memory but will be exceeded by the 12GB model. 6GB FirePro outperforms all the Nvidia Tesla cards up until Tesla K10. The new release is well positioned to compete with the offerings of Nvidia.

The problem for AMD is in the low-end markets where Intel is competing with its Bay Trail processor. AMD is offering Kabini, which has a relatively powerful GPU but is outperformed by Bay Trail in CPU speed and power consumption. Power is a key factor in the low-end markets because of the need for long battery timings by the consumers. AMD should improve Kabini's performance per watt if it wants to compete with Intel in the low-end markets.

Conclusion

The coming year will bring AMD back to profitability because of the console sales and improved graphics cards offered by the company. The low-end markets will be dominated by Intel's (INTC) Bay Trail because it has a lead on Kabini in terms of speed and efficiency; these characteristics are more preferred by low-end customers as compared to Kabini's superior graphics.

Diversifying away from the main competition into cloud computing and micro servers will contribute towards AMD's revenue and profitability. If the company improves its performance per watt situation, it could gain substantial sales by charging low prices in the low-end markets. But, diversifying away from competition like Intel is a sensible choice at this point.

Source: AMD's Turn To Perform