Despite manufacturing the CPUs (Jaguar 64 Bit) and GPUs (Radeon) for both the Sony PlayStation 4, and Microsoft Xbox One, AMD has failed to attract any positive interest from investors. Since hitting a 2013 high of $4.64 per share on July 18th, the stock has dropped 21.3% and closed at $3.65 per share on December 6th.
At the same time both video game consoles have sold out for their respective manufacturers. Market demand for these products is enormous. So, one would think, the System on a Chip (SOC) technology built into these processors, which AMD has perfected over the last few years, should be one of the hottest items in the computer hardware business. But the opposite is the case, at least if one takes the current AMD stock price to be a meaningful indicator of the true condition of the company.
The clear disconnection between the fortunes of AMD, and at least Microsoft (as the result of the holiday 2013 blow out for Xbox One) is a subject thoroughly covered by industry commentators. On November 18, 2013, Dan Gallagher published an article on this topic on the Wall Street Journal website, titled Console Bet is Played Out at AMD.
Mr. Gallagher focuses on three problems facing AMD:
- The company still looked to its PC chip business for “64% of total revenue in the first nine months of 2013, down from 74% a year earlier” (quoted from Dan Gallagher’s article, a link to which has been provided above)
- AMD owes a lot of cash to GlobalFoundries, “the chip-fabrication business it spun off in 2009. AMD will owe about $404 million to GlobalFoundries under a “wafer-supply agreement” in the current quarter and another $250 million in the first quarter of 2014.” (ibid)
- A persistent lack of profitability. The stock is trading, even at its December 6, 2013 closing price of $3.65, “at about 33 times projected 2014 earnings” (ibid)
I like the third of Mr. Gallagher’s reason as the most telling of the set. A very useful example of AMD’s consistent failure to win truly substantial profits out of its chip deals can be found in the webcast of their most recent quarterly earnings conference. During this call the CFO mentioned very tight margins on the first sales of this SOC architecture to Sony and Microsoft.
There’s talk now of a new SOC technology from AMD. Pundits claim this technology renders the PlayStation 4 and Xbox one devices just yesterday’s hardware. One would hope AMD will negotiate truly lucrative deals when it presents these products to its OEMs.
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