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Summary

  • While the PC market is expected to improve, AMD is unable to make the most of it due to the presence of Intel.
  • Intel's solid product innovation and client base is a big threat for AMD, which does not seem to have a strong pipeline.
  • AMD has got weak fundamentals and is expensively valued, which are more reasons to stay away from it.

Advanced Micro Devices (NASDAQ:AMD) is in trouble. The stock was having a good time before it came out with its second-quarter results and dropped 18%. AMD's outlook turned out to be pretty weak, with the company's estimated revenue of $1.43 billion to $1.51 billion for the current quarter coming in way below analysts' expectations of $1.57 billion. This looks like a clear indication that AMD is not being able to benefit from the stabilization of the PC market, and is losing share to Intel (NASDAQ:INTC).

Intel's innovation is a big threat

AMD's growth has been driven by its presence in gaming consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT). But this is not AMD's only business. As reported by Bloomberg:

"The projection may indicate that AMD isn't benefiting from a rebound in corporate spending on computers that has buoyed other companies in the personal-computer industry. Under Chief Executive Officer Rory Read, AMD is trying to get into new markets -- such as game consoles -- where it doesn't compete directly with Intel, its much larger rival in PC processors."

At the same time, Intel is making solid moves, and is counting on better conditions in the PC market. Intel's growth is expected to be driven by its solid product innovation moves. The chip company is rapidly expanding its product portfolio. As I wrote in a recent article on Intel:

"The Bay Trail family of SoCs has enabled Intel to expand into new segments. Its Bay Trail SoC volume in desktops and clam shells has more than doubled over the last quarter, representing over 60% of its Pentium and Celeron mix, and nearly 20% of its notebook mix. The Bay Trail family is helping Intel expand its presence in devices at lower price points, along with new segments like Chrome-based systems, without compromising on the margins.

The chip maker is continuing with its product innovation efforts. Recently, it announced a strategic relationship with Rockchip to accelerate and expand its SoC roadmap for the value and entry tablet market segment. In addition, Panasonic has also decided to use Intel's 14-nanometer process technology in its foundry business.

Intel is also getting ready to launch its next generation Haswell-based Xeon E5 platform, codenamed Grantley, later this quarter. The first 14-nanometer Broadwell Core M processor-based systems are also expected to be released during the holiday selling season, with wider OEM availability during the first half of 2015. Also, Intel's integrated baseband and apps processor for smartphones and tablets, SoFIA, is slated to be launched in the fourth quarter."

A few positives

It appears that AMD will find it difficult to cut its teeth in the PC market due to Intel's solid product innovation. However, there are some positive sides to AMD. The company has been able to minimize its expenses and improve the cost structure, which has reduced its operating expenses significantly.

At the same time, AMD has continued to invest in strategic innovations that will fuel its growth in the long run. AMD has also restructured its debt profile, which will reduce its interest expense. The company is also expanding into new geographies, while demand for its chips has remained strong, as evidenced by a 24% year-over-year jump in revenue in the previous quarter.

During the quarter, AMD reported increased shipments of semi-custom system-on-chips, led by strong demand for AMD-powered game consoles. This business is expected to improve in the third quarter, as Microsoft and Sony prepare for the holiday cycle. In its embedded business, the chip maker reported an increase in revenue as it bagged new orders from companies such as HP (NYSE:HPQ), Boeing (NYSE:BA), etc.

AMD is also gaining strength in its professional graphics segment. The company reported strong demand for its Firepro chip from computer giants such as Apple (NASDAQ:AAPL) and HP. AMD also spoke of OEM design wins in the notebook segment that are now ramping up. According to AMD, this is a margin-accretive market, and therefore, the company is keen on increasing its market share in notebooks.

Coming to dense servers, its revenue increased more than 100% as compared to last year. AMD is on track to launch the industry's first 28-nanometer, 64-bit ARM server processor - Seattle - which it is currently sampling.

Intel's presence will hurt AMD in PCs

However, it should be kept in mind that AMD might not benefit much from PCs. As Bloomberg reported:

"There was some hope that the positive for Intel would bleed over into AMD," said Cody Acree, an analyst at Ascendiant Capital Markets LLC. He recommends buying AMD shares. "They're missing out on something that Intel is seeing. AMD is just not there yet. They've historically had a weak enterprise share."

AMD said second-quarter sales in its computing solutions unit declined 20 percent from a year earlier, hurt by reduced shipments of microprocessors. Intel said July 16 that quarterly revenue in its PC processor division rose 6.2 percent.

As a result, it wouldn't be wise to count on AMD to benefit from the improving PC outlook, as Intel already commands a stronger share.

Weak valuation and fundamentals

Currently, AMD has a trailing P/E of 78, which is extremely expensive as compared to the industry's average of 26. At the same time, AMD has a weak balance sheet. It has total cash of $948 million, while the debt is huge at $2.21 billion. AMD's liquidity position also seems weak, as seen by a current ratio of 1.95. The company has got negative cash flow metrics as well.

Hence, due to stiff competition from Intel, it would be a good idea to stay away from AMD, and its weak fundamentals indicate the same.

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

Source: Will Intel Take Down AMD?