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Summary

  • AMD shares have been weak ever since the company posted weak results and a sluggish outlook.
  • AMD, however, is capable of turning around due to improvements in end-markets, new products and design wins at key players.
  • Better sales of consoles during the holiday season are capable of driving AMD's performance.
  • AMD's forward valuation looks sound, and the company's bottom line is expected to develop at a good pace in the next five years as compared to the last five.

Advanced Micro Devices' (NYSE:AMD) dream run came to an end after its second-quarter results. The chip maker's disclosed results were not enough to beat consensus estimates on the bottom line. AMD reported adjusted profit of $0.02 per share that fell short of the consensus estimate of $0.03. However, non-GAAP earnings of $17 million were way better than last year, when AMD reported a loss of $65 million.

What gives?

In addition, its revenue was in line with Wall Street estimates at $1.44 billion, an increase of 24% from $1.16 billion a year earlier. Also, AMD's revenue for the first half increased 26% as compared to the first half of 2013.

AMD, however, came up with a weak outlook for the current quarter, which sparked a massive sell-off. The company expects revenue in the range of $1.43 billion to $1.51 billion for the third quarter of 2014, which is below analysts' estimates of $1.55 billion.

Beyond the weakness

Nevertheless, AMD is working aggressively to build a stronger business model. The company is undertaking various initiatives to manage its expenses and lower the cost structure. At the same time, it is focusing on strategic investments to make the most of opportunities that should come up going forward.

AMD sees strong demand for game consoles, which should continue driving shipments of its semi-custom chips. Since AMD supplies chips for both the Xbox One and the PS4, it should benefit as Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) prepare for the holiday cycle.

New design wins to drive growth

So, AMD should continue benefiting from this market going forward. The chipmaker also is witnessing relatively good demand in its embedded business, driven by new design wins. Also, the company has announced design wins with HP's (NYSE:HPQ) thin clients, as well as Boeing's (NYSE:BA) next-generation advanced cockpit display systems that should enhance its growth. Moreover, its new design wins have helped it get hold of new thin clients, with a strong grip on gaming and industrial control. The company believes that these should propel its margins higher in the second half of 2014.

Advanced Micro Devices also is expecting its professional graphics business to deliver strong growth going forward. AMD has observed tremendous improvement in unit shipments, as its FirePro chip has gained business at Apple (NASDAQ:AAPL), Dell and HP. Also, the company is looking forward to gain market share in this margin-accretive market in the second half of this calendar year. Besides, AMD will be launching the industry's first 28-nanometer 64-bit ARM server processor in the next quarter, which is expected to drive growth in its dense server business.

Additionally, AMD also is experiencing strong demand for notebook GPUs due to OEM design wins that started to ramp up in the previous quarter. Further, the company expects to see higher GPU shipments this quarter, as the market pricing for its R7 and R9 offerings has now stabilized. Moreover, AMD is entering typically the stronger second half of the year for GPUs, with its go-to-market programs and design wins expected to deliver solid growth.

Improving PC environment and new products

Furthermore, the company is seeing strong demand for microprocessors in the PC market due to the introduction of new notebooks from Acer, Dell, HP, Lenovo (OTCPK:LNVGY) and others. The chip maker also launched its Pro A-Series APU, and it remains on-track to speed up the number of AMD-based commercial offerings available by the end of the year.

The company is expected to gain tremendously from its commercial offerings, as HP has recently announced a full range of elite commercial offerings that are powered by its chips. Also, the company expects more OEMs to roll out AMD-integrated commercial offerings. Apart from this, it also expects to benefit from the overall PC market that is now recovering due to the commercial refresh cycle.

All in all, AMD looks solid with its three-step transformation business model that is driving solid progress for the company. In addition, it has recently re-aligned several internal functions to create a single market focus team, which is designed to strengthen its traditional PC business and drive future growth in adjacent markets.

Conclusion

Advanced Micro Devices currently trades at forward P/E of just 26, as against a trailing P/E of 87, signifying rapid earnings growth going forward. Also, analysts expect the company's bottom line to grow at 15% for the next five years, which is way better than the annual decline of 41% seen in the last five years. Hence, investors should definitely consider making the most of AMD's recent drop, as it looks well-positioned to deliver long-term growth.

Source: AMD: The Long-Term Opportunity Is Still Strong