Why AMD Shouldnt Ignore the Internet of Things

By Markets Fool.com

Shares of AMD have plunged 37% over the past 12 months as the struggling chipmaker announced layoffs and missed Wall Street's third-quarter earnings expectations under new CEO Lisa Su.

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On Monday, AMD announced the departure of three top executives:Senior Vice President John Byrne, Chief Marketing Officer Colette LaForce, and Chief Strategy Officer Raj Naik. Byrne notably only spent seven months as general managerof the company's computing and graphics division.

Just last week, Byrne discussed his view of the Internet of Things, or IoT during a VentureBeat interview at CES 2015. When asked whether AMD would expand into the IoT market as Intel has done with wearables and tiny Quark chips, Byrne flatly replied, "I'm not in the business to lose money. Share and revenue is nice but so is profitability." Byrne emphasized that AMD should focus on improving the performance and power efficiency of its x86 chips instead.

Source: Wikimedia Commons, Wilgengebroed.

But now that Byrne has moved on, it might be time for AMD to reevaluate its position on IoT, which could prevent it from being crushed between Intel's x86 chips and NVIDIA's GPUs.

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The business of the Internet of Things
The concept of IoT is that everything -- wearables, cars, home appliances, and more -- will be connected to one another through various wireless standards. Research firm IDC believes the global IoT market will grow from $1.9 trillion in 2013 to $7.1 trillion by 2020. Presumably, that rising tide could lift chipmakers such as Intel, networking companies such asCisco , and Internet giants includingGoogle .

Intel's Internet of Things division consists of embedded chipsets that are used in retail environments, industrial sites, buildings, homes, and transportation. Over the first nine months of 2014, revenue at Intel's IoT group rose 23% year over year to $1.55 billion as operating income improved 26% to $431 million. While Intel's IoT segment only accounted for about 4% of its revenue and operating income during that period, its double-digit growth and profitability strongly suggest IoT might not be a money-losing venture for AMD after all.

AMD, though, lacks Intel's market clout -- according to IDC's third-quarter numbers, Intel controls 98.5% of the server market, 90.3% of the notebook market, and 81.8% of the desktop market. This means Intel can likely sell more embedded solutions on the foundations of its x86 market share than AMD can.

Birds of prey
That's not to say AMD does not have any embedded products at all. Last year, the company unveiled several such products -- Adelaar, Steppe Eagle, Bald Eagle, and Hierofalcon -- to expand into industrial control and automation, digital gaming, medical imaging, digital surveillance, smart TVs, and other non-PC businesses.

While those "birds of prey" are certainly scouting ahead for a possible expansion into IoT, AMD hasn't split those technologies into a separate IoT business in the way Intel has. Instead, they reside in AMD's enterprise, embedded, and semi-custom (server and embedded processors, systems-on-chip, engineering services, and royalties) business.

In the first nine months of 2014, revenue from that segment more than doubled to $1.8 billion and accounted for 42% of AMD's top line. That growth was helped by robust system-on-chip sales of for Microsoft's Xbox One and Sony's PlayStation 4 consoles.

Like a frog in boiling water
AMD has always been considered the cheaper alternative to Intel and NVIDIA, respectively, in x86 chips and high-end graphics cards. The problem is that whenever AMD's market share declines, margins fall as it tries to generate fresh revenue growth with cheaper products.

AMD Operating Margin (TTM) Chart

Source:YCharts

In the first nine months of 2014, AMD's computing and graphics revenue (which accounted for 58% of its top line) fell 13% year over year as it posted an operating loss of $20 million. AMD is also falling behind the technological curve when it comes to mobile processors -- its new 28-nanometer mobile Carrizo system-on-chip might not appeal to tablet and two-in-one manufacturers, whichare already experimenting with Intel's 14 nm Core M chips.

As AMD's market share remains under pressure in x86 chips and GPUs, it is increasingly finding itself being cornered by Intel. I believe AMD's revenue will keep declining unless the company increases the weight of its higher-growth embedded devices and system-on-chip offerings on its top line. Expanding the company's IoT efforts would be a reasonable way to do so, and would be a solid starting point for Byrne's successor.

The article Why AMD Shouldnt Ignore the Internet of Things originally appeared on Fool.com.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Google (A shares), Google (C shares), Intel, and Nvidia. The Motley Fool owns shares of Google (A shares), Google (C shares), Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.