Advanced Micro Devices (NASDAQ:AMD) is living on borrowed time. In a world where the high growth computing markets required X86 compatibility, and in a world where high performance graphics engineers and IP were at a premium, AMD could always get by as the #2 player to Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA). However, we live in much more competitive world and business models in this space have been turned upside down.
AMD Is Just Not A Good Business
However, good companies - even when hit with a fundamental disruption to their business models - can (and do) survive and quite probably flourish long-term. Bad companies, when faced with such transitions, are doomed to - at best - a life of mediocrity and a stock price that's wildly volatile and subject to whatever story Wall Street believes at the moment. Today, for AMD, it's "game consoles" and, to a lesser extent, "ARM servers".
AMD's PC CPU products haven't been competitive in years - not on power, performance, or cost structure. You can see it in AMD's "computing solutions" revenue which has been on a slippery downhill slope for as long as I care to remember. Trying to differentiate with a giant integrated GPU onto your chip and trying to undercut Intel (i.e. not getting paid for the premium performance) is just a bad, margin-killing, money-losing plan (especially when you unwittingly end up cannibalizing your own discrete GPU sales).
Speaking Of Engineers...
If you cut through the hype and head on over to Glassdoor, you'll get a glimpse of what's really going on at AMD. Just how happy are AMDers with how the company's doing? Well, if you believe Glassdoor, not very:
Right off the bat, you can see the real problem. Less than half of the 321 employees who left a rating "approved of the CEO" (51% don't approve). And, of course, while AMD's rankings in most of the key vectors are mediocre, the very worst is senior management. Oh, and here's a common sentiment that was echoed in no less than 48 reviews:
Shocking. Senior management is "just in it for padding their own pockets while the ship sinks" according to 48 individuals who have worked/currently work for AMD (their words, not mine). For completeness, here are the full thoughts of just a few of these engineers (you can read more here):
Remember: this is the same management team that's out promoting GPU/CPU share gains at various investor conferences, most recently a Raymond James conference, only to have the numbers from the real world shatter that fantasy.
And doesn't it worry any AMD longs that the employees don't even have confidence in their own CEO? You don't see this kind of utter disapproval of the guy calling the shots at reputable semiconductor firms like Intel, Qualcomm, Broadcom (BRCM), or NVIDIA (even Broadcom's CEO, the lowest rated of this bunch, still has a 77% employee approval rating).
Here's What Seems To Be Going On
The bottom line, in my view, on AMD is this: they're losing market share in PC processors (since Intel's are better performing/lower power/have a better cost structure) and trying to fight a price war. This is margin/profitability fail, and it's still not helping sales. The ARM (NASDAQ:ARMH) server thing seems like nothing more than an attempt to capitalize on the ARM hype, since AMD gains nothing by abandoning its X86 efforts in this space since AMD can - if its products are successful - have a leg up on all of the ARM server guys by leveraging its X86 license, a privilege that only a select few in this world have today.
Oh, and AMD appears to be giving the perception that it's done competing with Intel in servers (since that battle in big server chip land ended badly), but Intel was the first to market with a capable, fully integrated server system-on-chip known as Avoton. AMD's solution (known as "Seattle") is arriving to market later and is likely to be worse on performance/watt in compute-oriented workloads. Oh, and Intel is probably launching the Avoton follow-on this year.
Game consoles are nice, but certainly not the high margin super-business that many of the bulls were promoting until the numbers actually came out. And, of course, AMD is losing discrete GPU share in PCs to NVIDIA. Oh, but Mantle - a proprietary 3D API that AMD is almost certainly paying developers to use and is likely to go the way of 3Dfx's Glide API - will save the day, right?
So, What Are You Buying, Again?
You're buying a company that has $1.1B in cash, $2.06B in debt, can barely turn in a free-cash-flow breakeven or better year without selling assets, is in a very weak competitive position in all of its end markets (okay, except for game consoles), and on top of all of that still toots the PR horn like there's no tomorrow, bringing in legions of retail investors so fixated on terms like "Mantle", "APU" and "HSA" that the stock ultimately is a trading vehicle for the hype du jour.
And, hey, I'm sure many folks have made their millions swing trading AMD, but to call this stock an investment is an insult to all of the investment grade equities out there. I seriously question whether AMD will be a viable business five years from now. Perhaps they'll pull a miracle, but I wouldn't bet big bucks on it.
Disclosure: I am long INTC, BRCM, NVDA. 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.