AMD Rally Needs More Than Console Wins to Outrun PC Market: TechIan King
Advanced Micro Devices Inc. was the Standard & Poor’s 500 Index’s best-performing stock in the past month after winning orders in video-game consoles. To keep that streak going, AMD must prove it’s got more going than games.
The stock had surged 83 percent since April 15, through yesterday, sparked by Sony Corp.’s decision to use AMD chips in the next version of its PlayStation machine and a Bloomberg News report that the semiconductor maker will provide the guts of an updated Microsoft Corp. Xbox to be unveiled May 21. The shares dropped 13 percent today.
As demand for PCs slumps for a second straight year, AMD Chief Executive Officer Rory Read is lining up gaming customers in his push to get 20 percent of sales from outside the PC business by year’s end. While new revenue from areas where Intel Corp. doesn’t compete will strengthen that diversification effort, consoles -- a market that’s just over a 10th the size of the global PC industry by shipments -- may not be enough to make up for the sales shortfall.
“I’m really worried about the core business,” said Stacy Rasgon, an analyst at Sanford C. Bernstein & Co., who has a market perform rating on the stock. “They’ve actually lost more than a billion dollars from their core business over the last two years. Does that stop? I’m not sure.”
AMD’s console wins may boost annual sales by $700 million to $1.4 billion, generating profit of 30 cents to 70 cents a share in coming years, according to New York-based Rasgon. Still, analysts on average project AMD’s sales will fall 13 percent this year, to $4.7 billion, according to data compiled by Bloomberg. Revenue slid 17 percent last year.
James Covello, an analyst at Goldman Sachs Group Inc., cut his rating on the shares to sell today, citing concern that game-console wins can only “partly offset” declines in AMD’s PC business. The shares fell to $3.83 at the close in New York, for the biggest decline since Oct. 19.
“We expect continued disappointing results in the PC segment to mitigate the impact of increased revenue from gaming,” Covello wrote in a report.
First-quarter sales in AMD’s computer-chip unit fell 9 percent from the prior quarter, dragged down by lower shipments of chips for desktop and notebook computers. Sunnyvale, California-based AMD gets about three quarters of its revenue from microprocessors.
Even Intel, whose sales fell 1 percent in 2012 and are projected to be little changed this year, hasn’t escaped the slump. At the end of the first quarter, AMD had 14 percent of the market for PC processors, compared with 85 percent for Intel, according to Mercury Research.
Thanks in part to the gaming-console win, AMD has posted the biggest gain in the S&P 500 since April 15 -- as of yesterday, its advance dwarfed the increase of the next-best performer, Akamai Technologies Inc., by 43 percentage points. The chipmaker’s advance compares with an 11 percent rise in the benchmark Philadelphia Semiconductor Index.
As it grapples with PC-market declines, AMD is also aiming to get as much as half of its sales from the so-called embedded processing market and other high-growth businesses in the “next two to three years,” Read told analysts and investors on April 18. The broader market for embedded PC chips used in products such as industrial machinery, medical devices and home-automation appliances will reach $7 billion by 2016, he predicted.
“He’s trying to find niches where Intel is not and carve out a living,” said Chris Danely, an analyst at JPMorgan Securities in San Francisco. He has a neutral rating on the shares. “Does it mask their problems in PCs? No.”
Part of AMD’s share gains may have been triggered by bets that its shares would fall, or so-called short sales. Short sellers profit from price declines by selling borrowed securities and replacing them with stock bought at lower levels.
The short interest in AMD, which peaked at 25 percent in November, is now at 16 percent of the total float, or shares available for public trading. That’s more than three times the short interest in Intel shares. Stock gains for companies with a high percentage of short interest can be exaggerated by a rush to buy the underlying security and unwind short contracts to limit losses if there is positive news that sends the stock higher.
The relative strength index for AMD, a moving average used by traders to gauge whether a stock may be poised to rise or fall, was at 88 yesterday. Any time the measure goes above 70, a stock is statistically more likely to drop than increase.
For the first three months of 2013, the company reported its third consecutive quarterly loss and is on course to report a second straight yearly net loss, according to data compiled by Bloomberg.
Some analysts, such as Mark Lipacis at Jefferies LLC, are more optimistic about AMD’s chances in the PC market, saying it could take market share from Intel with new processors aimed at notebook computers that will sell for retail prices of $300 to $500. The company also has an opportunity to siphon sales from rival graphics-chip maker Nvidia Corp., Lipacis wrote in a report.
Also underpinning any change in AMD’s fortunes is the need for an improvement in execution, according to Bernstein’s Rasgon. The company, the only surviving competitor to Intel in the market for PC microprocessors, has had periods in the past when it’s taken share from its larger rival, only to be tripped up by manufacturing or design delays.
AMD’s Opteron, introduced in 2003 as its first chip designed for servers that run on PC processors, helped the company grab more than 25 percent of that lucrative market. After failing to bring new chips to market on time, AMD’s share had dwindled to 4.3 percent by the fourth quarter of last year, according to Mercury Research. That was close to the level it had before it unveiled Opteron.
Given the company’s history, most analysts remain wary. Some 71 percent of the 31 who follow AMD have hold ratings, while 16 percent recommend selling. The chipmaker will have to show measurable benefits from game consoles and other new markets to prove that it can maneuver its way out of the shrinking PC market. And though the game console business is a good start, it’s just a first step.
“It seems like a slam dunk,” said Bernstein’s Rasgon. “But I’ve seen them miss what I thought were slam dunks.”