Advanced micro Devices (NASDAQ:AMD) has seen a lot of ups and downs over the last few months. However, the overall trend in the stock price has been positive during the period - the stock is up over 50% during the last twelve months. The company is going through a turnaround and it is finally coming back to profitability. Since last year, the company has shown interesting product launches representing research and development costs well spent. The financial position of the company is getting better and the revenue growth is impressive as the company announced first quarter results.
A Look at the Financials
The company announced its first quarter results yesterday - revenue for the first quarter was down 12%, sequentially. However, the year-over-year growth in revenues was impressive at 28%. The revenues in the fourth quarter of the last year were higher due to the launch of gaming consoles by Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE). Sony reported that it sold 7 million PS4 consoles in the first four months, which is twice as much as PS3 sold in the same time. More importantly, the company's operating profit margin improved significantly. In the same period last year, the company had a $98 million operating loss on $1.09 billion of revenue. In the first quarter, the company produced $49 million of operating profits on $1.4 billion of revenue. This was mainly possible because of the company's strategy of its high growth product transition. In 2012, the company's revenue comprised of only 9% from high growth markets and 91% from the traditional mature or declining markets - in 2013, this ratio became 30/70. The company expects to take this ratio to 50/50 by 2015. Focus on high growth areas will continue to drive the revenue growth over the next few quarters.
Despite impressive revenue growth, the company was not able to report a profit, and the net loss for the quarter stood at $20 million, or $0.03 per share. Nonetheless, the changes in the revenue mix should allow the company to report profits in the medium to long term. The cash position of the company is extremely strong, which is important for a company making a turnaround. AMD had $982 million in cash and cash equivalents, well above the minimum limit of $600 million set by the company. The company also issued new debt securities worth $600 million at 6.75% - the proceeds were used to buy back $423 million worth of convertible notes yielding 6%. The company also repurchased $48 million worth of senior notes and $64 million worth of convertible notes, yielding 8.125% and 6%, respectively. As a result, of this bond issue, the interest expense of the company should go up. For the first quarter, interest expense for AMD went up by $3 million. The growth in the graphics segment remains extremely impressive - the company recorded year-over-year growth of 118% for this segment - however, sequentially, the revenues were down 15%.
Profit Margin May Improve Further
AMD has recently launched its latest graphic card, Radeon R9 295X2. It carries a dual processor and 8GB of DDR5 memory and liquid cooling system. The company claims that it is the fastest graphic card in the world. Although it focuses on a niche market of high-end gamers, it will allow the company to increase its profit margin as it provides a premium product. The card's retail price will be $1,499. Nvidia (NASDAQ:NVDA) is expected to launch its Titan Z, which will be selling at a retail price of $2,999. However, Titan Z might not be in direct competition with Radeon R9 295X2 as it might not be targeting gamers only. The retail price of the Titan Z has allowed AMD to price its own card at these levels without too much unrest in the gaming community as the card is still selling for half the price of Titan Z. Radeon R9 295X2 has excited the gaming community and the company should get strong demand for the product.
Is Mantle Any Good?
Games on computers are run through graphics API specification codes and software such as DirectX, a Windows owned software. Ever wondered how a gaming console supports every latest game until the next model of that console is launched when gaming computers become outdated in a year or two? It is because the gaming companies optimize their games on these consoles while making them. While there are so many graphic cards and models in PC gaming, a standard could not be set. This is where DirectX plays its role. However, there is still a vast difference between the performance of consoles and PCs.
AMD took the lead to come up with its own API specification codes, which the gaming companies would use to optimize their games. As a result, the performance of games running on AMD graphic cards will improve. The idea was great until Nvidia optimized its new graphic cards according to DirectX and beating AMD at performance.
Although there is a huge price difference in the two competitors, AMD could lose its niche high-end market to Nvidia. AMD claims that Mantle can be 45% faster than the Direct3D, and it will be an open API. The performance of the cards and CPU can be enhanced through Mantle and its current implementation is only for the GPUs and AMD's Graphic Core Next architecture.
AMD is a good turnaround play and the company is making progress on its strategy. The focus on the high-growth areas will allow the company to continue its revenue growth, and the launch of new products should also enhance the margins of the company. At the moment, the financial position of the company is good - cash and cash equivalents are enough to meet the needs of the company, and the recent moves in debt have allowed AMD to extend the maturities of its debt. We believe the stock is a good bet with a limited downside and it should continue its upward movement over the next few months.
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 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.