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Advanced Micro Devices Is a Risky but Interesting Investment

June 25, 2014 | About:
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kcpl

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Advanced Micro Devices (AMD) has disappointed the Street with its poor performance in the fourth quarter. The company could not meet expectations. Moreover, management gave a negative outlook, and this hurt its prospects. Above all, the company is facing tough competition from peers such as Nvidia. But, despite of all these concerns, management is counting on some positive aspects that could bring the company back on track. Let us take a detailed look at its performance and prospects.

Strategies for improvements

AMD has completed its restructuring, aimed at creating a more efficient business model. It basically involves a three step strategy that will drive the company forward and also reduce its operating expenses.

AMD has launched a strong and diverse set of new products that could help it boost its numbers and return to profitability in the second half of the year. The chipmaker is mainly counting on three things that will help it turnaround its present situation such as a diversified portfolio; semi-custom, ultra-low power client embedded dense servers, and professional graphics

AMD could use the increasing demand in the gaming industry to its advantage. According to a report, Sony and Microsoft, the two main gaming console manufacturers, have sold more than 7 million units of their consoles in less than two months. Although this is a combined data, but still this is more than double the number of prior-generation consoles that they sold during the introductory period. AMD cites this as a great opportunity to increase the sales of its game console system-on-chips.

Its embedded business continued to grow throughout 2013, and going forward, its unparalleled processor designs will further enhance its numbers. The company is counting on two of its latest launches, the x86 and ARM solutions, to drive its growth in 2014. It plans to start this new ARM solution in the latter part of this quarter and expects strong demand from traditional server OEMs and cloud providers.

AMD is about to launch one of the industry’s first 64-bit ARM server SoCs for dense servers. This system incorporates a dual AMD FirePro GPU. With these new launches, management is optimistic about doing better in the future.

Graphics prospects

The company has accelerated the transition to its new R9 and R7 graphics chips, which has increased its Graphics Processing Unit (GPU) revenue considerably and expects to gain graphics market share with these new chips. In addition, AMD is shifting its focus from the PC desktop market to the mobile GPU market.

Its recent launch “Kaveri” advanced processing units (APU) and FX CPU showed strength. Kaveri incorporates a heterogeneous system architecture (HAS) that can improve performance and power efficiencies when running modern workloads. Also, AMD has solid designs for notebooks, incorporating Kaveri and its next generation low power Mullins and Beema SoCs. Management expects these new launches to fuel its growth in the future.

However, as mentioned earlier AMD is facing tough competition from Nvidia, especially in the gaming market. Nvidia has launched its new GPU known as Maxwell, which is based on Kepler architecture and will compete with AMD’s R9 270. Although R9 270 is faster than Maxwell, but it consumes around 50% more power than the latter.

Moreover, Maxwell, which comes in two variants, is priced at $119 and $149. On the other hand, R9 270 is priced at $179, which is a big disadvantage for AMD. AMD’s Radeon 280 is priced even higher at $279. The increasing price of AMD’s GPU is mainly on account of crypto currency mining. This is going to badly affect its sales in the long run.

Conclusion

AMD aims to achieve revenue growth and profitability with the help of its diversified product portfolio. This is one of the main objectives of the management for the year and creates a more balanced and consistent revenue stream. But the company has to face a serious challenge from Nvidia, especially in terms of pricing. The stock has a forward P/E of 24, and considering all the above factors, investors with a high risk appetite should consider adding AMD to their portfolio.


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