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Summary

  • AMD's sales mix weakened results in its visual segment, which was in-line with my expectations.
  • Further deceleration in traditional CPU/GPU market share will most likely continue.
  • Broadwell will continue to diminish AMD's competitiveness in the standard CPU channel, and assuming there's further deterioration in this market, AMD's consolidated results will disappoint.

AMD (NASDAQ:AMD) continues to lose the standard PC and GPU channel. While AMD has communicated that it's diversifying away from traditional markets, I question what other product categories AMD can pursue in which it generates reasonable volume and gross profit.

Intel's (NASDAQ:INTC) next-generation solution is expected to come out by the end of the year, and this will do further damage to AMD's competitive positioning, as Intel's transition to next-generation components will force AMD to lower its pricing. Lower pricing will compress gross margins, which will trickle to bottom line results. The lack of competitiveness is likely to continue in traditional markets, and diversification into niche markets may not have enough of a material impact over the short-term.

AMD continues to lose in the standard PC channel

Going forward, I'm extremely concerned about AMD's competitive positioning. It's doubtful as to whether the company can sustain its niche in traditional markets and while its semi-custom solutions for consoles are preventing AMD from becoming completely irrelevant, I believe that AMD's computing solutions segment will exhibit declines following a period of stagnation, as Intel's 14nm Broadwell solution will hit the marketplace over the next two quarters. While AMD will continue to lower its ASP on its products to remain somewhat price competitive, it's likely that Intel's mid to high-end solutions will become more price competitive with AMD's highest end solution over a brief period of time in 2015, as Taiwan Semiconductor (NYSE:TSM) has yet to transition to its 16nm process.

Meanwhile, Intel communicates that 14nm CPUs are in full production, and while gaining designs wins will be difficult on the mobile front due to Qualcomm's sheer economies of scale, the same cannot be said about AMD. The skepticism I have toward AMD is driven by the lack of sensitivity to pricing by consumers in developed markets. Consumers are willing to pay more for a faster CPU, and are unwilling to buy an inferior brand/product, which is why AMD has less support from OEMs(Dell (NASDAQ:DELL), Hewlett-Packard (HPQ and Apple (NASDAQ:AAPL)) when compared to Intel. The lack of OEM support when compared to Intel, severely constrains demand from the sales channel, and with fewer opportunities to move product, AMD's sales will continue to weaken. The loss of sales has a reinforcing impact on AMD's ability to compete, as it has less free cash flow to develop competent intellectual property, and it also diminishes AMD's ability to return capital to shareholders. This makes it an overall unappealing investment.

Earlier in the year, I mentioned that AMD graphics solutions could disappoint:

I have no way of knowing how much revenue will come from the graphics and visual segment. However, analysts have been quick to act on the reports of sales-channel weakness, which is why I'm convinced that a decline in high-end GPUs will have a material impact. This is because the R9 series GPUs have above average ASPs - pair that with high volume and sudden drop-off in demand following production ramp, and AMD may report weakening top-line sales well ahead of consensus estimates.

And some of my concerns were echoed in its most recent (Q2) earnings release:

Graphics processor unit (GPU) revenue decreased sequentially and year‐over‐year, primarily due to a decrease in AIB (add-in board) channel sales, partially offset by increased sales of professional graphics and desktop OEM GPUs. GPU ASP decreased sequentially and year‐over‐year, primarily driven by lower AIB channel sales.

Industry data indicates that the add-in board market will continue to grow, albeit incrementally. However, if AMD's market share losses continue favorable industry data/organic growth will do little to offset declines coming out of the computing solutions segment. Most of the slack will have to be picked up by console sales, which usually slow going into the second and third year of the initial launch.

Quoted from Guru 3D, the figures strictly pertain to Q1:

Jon Peddie Research reports shipments of graphics chips have gone down 4 percent year-over-year and 11 percent quarter-over-quarter in Q1 2014. Compared to the previous quarter, AMD was the biggest loser as the company saw its shipments decline by 18.2 percent, whereas Nvidia (NASDAQ:NVDA) dropped just 10.4 percent while Intel saw a decline of 7.9 percent. In terms of market share, this means Intel gained 1.7 percent, Nvidia remained flat and AMD declined 1.6 percent.

The trend in declining market share is a bit unsettling, and the incremental impact from crypto-currency overly exaggerated AMD's market position. While seasonal impact will boost sequential comps, it's unlikely that AMD will gain market share in traditional GPU markets.

Quoted from ComputerWorld:

AMD's x86 processor market share was 16.9 percent, growing from 14.3 percent in the same quarter last year, according to a study by Mercury Research. Intel's market share dipped to 82.8 percent from 85.2 percent in last year's first quarter. AMD x86 chips bought by Microsoft and Sony for use in their hot-selling game consoles accounted for 4 percent of AMD's market share, McCarron said. Market share resulting from game consoles should remain consistent for AMD, McCarron said.

Bottom line

When excluding the 4 percentage point gain by console systems, AMD's market share in the traditional CPU market was 12.9%. AMD lost market share when excluding consoles. Not only that, AMD lost market share in the GPU segment as well. Which is why AMD's lack of competitiveness in traditional markets leaves me highly skeptical of AMD's long-term growth potential.

Console systems are one of the few devices that generate significant volume at reasonable gross margins. I don't think there are many niche opportunities that AMD can uniquely pursue in which they can generate reasonable profitability and unit volume outside of console gaming, PCs, tablet, server and smartphone. Because of this fact, AMD will have difficulty with generating growth, despite being a smaller company when compared to peers in its space.

I'm initiating a sell rating on AMD. I think traditional markets have too large of a material impact on AMD for investors to ignore.

Source: Sell AMD: Traditional Markets Will Do Damage