Budget Gaming Or Bust For Advanced Micro Devices

Jun.14.12 | About: Advanced Micro (AMD)

Advanced Micro Devices, Inc. (NASDAQ:AMD) has been declared dead more times than a red shirt from the original Star Trek. Its current technology, the second generation APUs known as Trinity, is a unique offering in the market - a merged CPU/GPU combination that represents where AMD believes computing needs will trend in the future. As the personal computing market undergoes a sea change towards more mobile appliances, the need for a strong CPU will drop.

Indeed, many argue that the time is already here, that CPUs are already fast enough for what most people need them to do 90% of the time. That is likely overstating the case, but it contains a kernel of truth, one that AMD is hoping is closer to reality than its antipode, Intel (NASDAQ:INTC), believes. So, with that in mind, Trinity represents a maturation of AMD's strategy to dominate the consumer end of mobile computing, ceding the high end to Intel completely.

The Game's Afoot

Where Trinity fits into today's computing space is in the budget to mid-end consumer laptop and tablet arena, building on the success of the previous Llano line of APUs that sold very well. When a person could walk into a Best Buy and pick up a laptop for $399 that was capable of not only serving as a good productivity computer, but also then kick back and play recently-released games at respectable frame rates, then that is a powerful spot to be in.

Despite the headlines, Q1 2012 was operationally solid for a supposedly dead company. CPU revenue was up slightly year over year and margins were higher. The divestiture from Global Foundries has been fully written off so that no longer weighs on the stock's price.

Trinity's performance is significant, but only to keep pace with both the gaming industry and with Intel's new IvyBridge series of CPUs. The early benchmarks results confirm that Intel's new HD4000 integrated graphics provide respectable performance when matched against the top-of-the-line Trinity chip, the A10-4600M. The best versus the best are similar at this stage, but the HD4000 is only mated with the Core I7 CPUs. The I5 and the I3 IvyBridge chips are running the much slower HD2500.

And this is where AMD has its opportunity. The A8 and A6, while working with crippled versions of their Radeon 7000 series GPUs, are still running with the 7000 series cores. In the comparisons that have been shown to date, Trinity's image quality is far superior to that of Intel's. So, while frame rate benchmarks are important, user experience is not just bound up in the numbers.

Ultra Sleek Thinness

With Apple (NASDAQ:AAPL) announcing the new MacBook Pro, using the Core-I7 IvyBridge solution with a Retina display, Intel has no worries about selling units of its new mobile chips. But, it is Intel's own competition to the MacBook Air, the Ultrabook, which may ultimately get squeezed in this next round of mobile computing. AMD's top end Ultrathin notebooks will be targeting a $899 price point, just $100 higher than where Intel's Ultrabooks will start.

Since Apple has decided to upscale its notebooks even further, starting at $1,199 and ranging up to $2,199, Intel's OEMs have a narrow window to price IvyBridge Ultrabooks and be attractive. AMD is looking to provide the market with a low power thin notebook that starts at $599. At that price differential, it should not be hard to get OEMs to embrace the design. The low end will not be Trinity APUs, but rather the updated E-Series, Brazos 2.0 ones that are extremely cheap to produce and provide very good margins.

Delay and Pray

AMD's problems stem from its past troubles owning and operating Global Foundries. Trinity is a product line that should have been out in late 2010, and not in the second quarter 2012. By divesting itself of that headache, it opens up its options for fabrication. At this point, products like Brazos 2.0 and even Trinity are delaying tactics - products designed to provide cash flow, while its engineers work overtime to catch up to their own roadmap. It will not be an easy path.

But, as long as the company is operationally profitable, as it was in Q1 and stay on course, it will have a niche in the market it can build on. The upcoming Windows 8 tablets and hybrid laptops running a low-power version of Trinity should come in at a much more attractive price to performance points than Intel's IvyBridge - allowing AMD some needed design wins in that space.

Those sales are needed to tide the company over until it can realize sales from its two major coups, providing the graphics engine for Nintendo's new Wii-U and the recently leaked specs for the Playstation 4, which will use the next generation APU in conjunction with a second discrete GPU. The Wii-U is due to go on sale in the fourth quarter, while the PS/4 is on tap for 2013. Rumors also abound that Microsoft (NASDAQ:MSFT) will go AMD for the Xbox 720, but nothing has been confirmed.

Of course, buying the rumor is a dangerous way to invest. At this point, AMD is still a company in transition, looking to hold onto what it has, while focusing itself on a particular market niche - that of providing better gaming performance per dollar for the budget-minded consumer. This should play well in emerging markets like China and India. The first Trinity notebooks from Hewlett-Packard (NYSE:HPQ) is going on sale in India very soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.