3 Ways Advanced Micro Devices Inc. Can Save Itself

By Markets Fool.com

Shares of chipmaker Advanced Micro Devices have fallen 43% over the past 12 months. Its core CPU and GPU businesses were respectively marginalized by Intel and NVIDIA, which caused AMD's average selling prices to fall across the board. A slowdown in the PC market exacerbated that pain.

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Last quarter, AMD reported a net loss of $180 million, compared to a loss of $20 million a year earlier. Revenue plunged 26% year over year to $1.03 billion. Although many investors believe there's not much value left in AMD stock, let's take a contrarian view and discuss three ways the chipmaker could save itself.

1. Expanding into Chromebooks and IoT chips
AMD hasn't made chips for Chromebooks or Internet of Things, or IoT, devices, while Intel has embraced both high-growth markets. Research firm Gartner expects Chromebooks to claim 4.3% of the PC market by 2017, up from 1.5% in 2014. IDC expects the total IoT market to grow from $1.9 trillion in 2013 to $7.1 trillion by 2020.

Chromebooks. Source: Google.

AMD's reasoning was the same for both: it didn't want to weigh down its bottom line with low-margin products. Chief Technology Officer Mark Papermaster called Chromebooks a "rock-bottom" market at the ISSCC conference in February. In January, AMD's since-departed computing and graphics chief John Byrne told VentureBeat that he wasn't "in the business to lose money" when it came to selling IoT chips.

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Yet by avoiding both markets, AMD ignores two key facts. Selling low-margin chips would still generate fresh revenue growth. Considering that AMD's computing and graphics revenue plunged 38% annually last quarter, it wouldn't be a terrible idea. Second, it ignores economies of scale: if AMD can sell low margin products at sufficiently high volumes, the cost per unit could drop.

AMD probably isn't confident that it can sell enough Chromebook or IoT chips to bring those costs down. If it failed to do so, the unit's operating loss -- which already stood at $75 million last quarter -- could widen. Nonetheless, AMD shouldn't prematurely dismiss those two opportunities for growth.

2. Spinning off its computing and graphics division
Considering how poorly the computing and graphics division has fared, it might be wise to spin off or sell the unit. After all, the enterprise, embedded, and semi-custom, or EESC, unit generates plenty of revenue on its own:

1Q Revenue

YOY growth

% of 1Q Revenue

Computing & Graphics

$532 million

(38%)

52%

EESC

$498 million

(7%)

48%

Source: AMD quarterly earnings report.

Moreover, AMD's EESC business remains profitable, although its operating income fell 47% year over year to $45 million last quarter. The EESC business is mainly propped up by sales of system-on-chips for Microsoft's Xbox One and Sony's PlayStation 4, but it has also expanded into microservers, which IDC forecasts will account for 10% of all servers by 2016.

Unfortunately, AMD recently shuttered its SeaMicro brand of microservers, which were considered a potential showcase for its new ARM-based processors. Other microserver makers could still install AMD's ARM-based processors in their microservers, but there are already plenty of other ARM-based microserver chipmakers in that field, such as Texas Instruments.

If AMD sells its computing and graphics division, it could invest that cash back into strengthening its EESC business. However, the EESC unit might be too dependent on IP from the Computing and Graphics segment, and the two businesses could be too tightly intertwined to be separated. Moreover, if AMD becomes even smaller, it could lose whatever pricing power it has left in the market.

3. Sell itself to mobile chipmakers
Therefore, a better option would be for AMD to shop itself around to potential buyers. With a market cap of just $1.8 billion, AMD could be easily acquired by a larger chipmaker such asSamsung orQualcomm.

Source: Pixabay.

Both companies, which make ARM-based chips, would benefit from acquiring AMD's license to manufacture x86 chips. That could help either one expand from mobile devices and into Intel's core market of laptops and desktops.

However, it's not that simple. Any company that buys AMD would also inherit the company's $2.3 billion in debt. AMD also had a negative free cash flow of $163 million over the past 12 months, and has less than $1 billion in cash and short-term holdings. Meanwhile, both of its business units are posting negative top- and bottom-line growth.

The takeaway
AMD isn't a safe stock by any means. These three lifesaving strategies are long shots that might never happen. However, they offer valuable insights into AMD's previous business decisions, and highlight the value that might remain in its core businesses.

The article 3 Ways Advanced Micro Devices Inc. Can Save Itself originally appeared on Fool.com.

Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Gartner, Intel, and Nvidia. The Motley Fool owns shares of Apple and Qualcomm. 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.