Advanced Micro Devices (NYSE: AMD) is a provider of computer processors, graphics cards and server processors. The company has an EV of 3.638B and is a prominent player in the electronics industry. Currently, the company is in a "turnaround phase," trying to capture market share in the emerging Cloud computing trend while smartly managing a declining revenue stream from its PC operations.
AMD produces chips for IBM's PCs and Microsoft (NASDAQ:MSFT) products, including Microsoft's recent Xbox One. Though Xbox One faces stiff competition from PS4, substantial Xbox One sales have helped AMD to generate positive net income in the most recent quarter. It helps that AMD can take advantage of not just Xbox One, but the entire gaming industry. AMD's website proudly states, "Our technology is inside every major next generation gaming console and home entertainment system." As the US and global economy ramp up, gaming consoles and other home entertainment sales are sure to increase. Advanced Micro Devices put itself in a great position to bring in revenue from growth in the game console and entertainment industries.
Among other notable achievements, Advanced Micro Devices presented a new A4-5000 quad-core advanced processor unit for ZBOX Nano AQ01. The upgrade allows for better 3D graphics, rendering and video playback capabilities "that rival discrete add-in boards." This kind of progress in a tough competitive environment hints at smart management and human resource policies that will likely continue serving AMD very well.
The company is investing in Cloud services to stay on top of industry trends. AMD management feels anxious about being too conservative, and with good reason. The last large development in the computer hardware industry was the explosion in mobile devices. For the most part, AMD missed out and stuck to declining PC sales. This was a painful miscalculation. Now that the mobile market is approaching saturation (Who do you know that does not have a mobile device?), AMD management is keen to correct its mistake and stay on top of the next computing trend: Cloud computing.
AMD management seems aware that the competitive environment includes many small and relatively obscure startups that also see potential in the Cloud. This is encouraging in a sense since others' interest validates AMD's opinion that Cloud services are the next "big thing" analogous to the mobile device market. Despite the tight competition from small businesses as well as giants such as Intel (NASDAQ:INTC), AMD's recent quarterly income improvements hint that AMD can hold out and even grow in the near future.
Risks and Uncertainty
Given Intel's greater financial resources and brand name recognition, AMD faces a real threat from Intel's encroachment into AMD's tenuous presence in the mobile device market. To grow, the company needs to engineer a smooth transition to providing processors, graphics cards and other hardware for growing cloud-based products and services. This new AMD equipment must allow for functional Cloud services from PCs, laptops, smartphones and tablets. This is a significant operational challenge to AMD design and development managers.
Consider that in Q3 2013, net inventories were valued at $922M, up 64 percent from Q4 2012 inventory values of $562M. Inventory increase hints at optimism about near-future demand. Typically, inventories are a drag on profit margins. Businesses try to minimize the amount of inventory they hold at a given time without compromising customer service. Therefore, increased inventories indicate that ADM managers expected the extra inventory cost to be compensated by increased sales and revenues in the next several months and years. This is a bullish indicator for AMD stock.
What's most interesting about Advanced Micro Devices is its significant inventory boost. That, combined with positive net income, continued new graphics cards and processors, as well as its capture of the gaming console market all bode well for AMD stock. However, AMD exists in a harsh and competitive environment. Many small start-ups are trying to chip away at its Cloud market share. Intel is a dominant player that, frankly, overshadows AMD in terms of processor research and design capabilities. AMD stock merits a "Buy" recommendation but with the disclaimer that such a recommendation is not for risk-averse investors.
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.