Advanced Micro Devices Is Undervalued: Great Bet For Long-Term Investment

| About: Advanced Micro (AMD)

Advanced Micro Devices (NASDAQ:AMD) suffered a negative market reaction right after it released its 3rd Quarter Financial Report last October 17. This downbeat treatment of AMD's shares is grossly unfair considering that AMD actually beat market expectations. However, this report did not please a lot of investors who promptly dumped their AMD stocks.

The report showed that for the second consecutive quarter, AMD made a positive net profit - $48 million for 3rd quarter of 2013 - a huge improvement to the $157 million loss it suffered for the same quarter last year.

Third-quarter gross revenue also increased to $1.46 billion, a decent increase from last year's $1.27 billion. The gross profit margin has also increased to 36%, a good indication that the company has reduced expenses and on track to profitability for 2013.

AMD's share is trading at $3.33, still down from its October 17 high of $4.09. The almost 20% drop is a big letdown since AMD actually performed very well for this year. The current stock market dislike of AMD offers value investors a great opportunity to buy low and sell high later.

AMD Is Not in Danger of Extinction

Despite the huge drop of PC sales the past few years, AMD has weathered it well considering its small size. True, traditional desktop computer products will decline more in the next coming years and will further affect AMD's balance sheet. However, this company is well-prepared for this eventuality and has already made steps to protect its core chip making business. It has nimbly branched out into other sources of revenue.

AMD has found a new growth engine - it has a great semi-custom System on Chip (SoC) side business now in place. The company already has a guaranteed (and very big potential) source of new income from semi-custom chip making. AMD won the contract to use its next generation processors to power both the upcoming Sony (NYSE:SNE) PlayStation 4 and Microsoft (NASDAQ:MSFT) Xbox ONE game consoles.

Industry observers already predict that AMD can earn as much $5 billion new revenue from supplying chips to the PlayStation 4 and Xbox One for the next few years. The SoC consoles sales can adequately offset the loss revenue that AMD is expected to suffer from further decline in desktop computer sales.

Sony and Microsoft are scheduled to launch their respective new consoles this coming November. Both of which are equipped with AMD's Jaguar System on Chip (SoC). Sony has already predicted a higher sales estimate for PlayStation 4. If Xbox One and PlayStation 4 sell as much as they used to, AMD is guaranteed big money orders from Sony and Microsoft for the next 5 years.

Other Sources of New Revenue

AMD is also aggressively pushing towards the lucrative tablet and hybrid tablet/notebook product category. Its new Temash APU is already found in some hybrid tablets that are recently becoming popular with consumers. This target market segment offers AMD the chance to replicate Nvidia's (NASDAQ:NVDA) great success with its Tegra chips that are now found in millions of Android tablets. AMD is topping Nvidia in the PC gaming graphics cards business so it has the technical expertise to deliver a Tegra-slaying tablet-centric processor very soon.

AMD can also greatly benefit from Microsoft's generous reduction of OEM licenses for Windows 8.1. Microsoft is aggressively trying to push sales of its new Surface pro tablet and has recruited new industry support by lowering OS licensing fees. Like Intel (NASDAQ:INTC), AMD is also producing SoC processors for OEM manufacturers.

Windows 8 hardware manufacturers want a cheaper SoC alternative to Intel's Bay Trail-T SoC so that they can make sub $300 Windows 8.1 tablets and phablets. Right now the hot price range for Android tablets is at $150-300, a cheap OS and a cheap SoC from AMD can give Windows 8 tablets a good chance of matching Android tablet sales.

Aside from the tablet segment, AMD is also venturing into the profitable corporate server market with its recent acquisition of SeaMicro. SeaMicro specializes in providing server machines with low-power consumption ARM processors. AMD currently has a 5% market share in the global server market, way down from its highest peak in 2003. AMD's x86 chip, Opteron, was once a dominant choice for server architecture in the early 2000s.

AMD is hoping to regain server business with the upcoming release of its new server SoC, "Seattle." Seattle is AMD's 64-bit ARM server processor. It will support up to 128GB of RAM.


AMD's low stock price is great for bargain hunters and long-term investors. The $3.33 price may shoot up once Xbox One and PlayStation sales figures come in. Buy it low, sell it high later next month or hold for bigger long-term profit.

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

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Semiconductor - Broad Line
Problem with this article? Please tell us. Disagree with this article? .