AMD Is Better Off Keeping All Its Businesses Under One Roof

Shares of AMD (NYSE:AMD) posted their biggest gains since February in the past week, fueled by rumors that the chipmaker is in the initial stages of reviewing whether to split itself in two, or spin off a business, in an effort to return the company to profitability. According to sources in a Reuters report, AMD has asked a consulting firm to help it review its options and draw up scenarios on how a break-up or spin-off would work. One option under consideration is separating AMD’s graphics and licensing business from its microprocessor business. ^[1]

AMD has officially denied the rumors, reiterating the fact that the company remains committed to the long-term strategy it laid out at its Financial Analyst Day last month. At the event, AMD provided details of its multi-year strategy to drive profitable growth by delivering next-generation technologies across the key areas of gaming, immersive platforms and data centers. Taking advantage of its expertise in high-performance CPUs and GPUs, visualization and power efficiency, the company firmly believes that the above mentioned segments will be cornerstones of its recovery plan.

Owing to a decline in PC shipments, market share loss to Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA), as well as a late entry in new emerging markets, AMD saw its revenue base shrink in 2012 and 2013. Though the company reported a marginal improvement in its top line in 2014, as it successfully ramped up a diverse set of new products in non-PC growth markets, Q1 2015 results were disappointing, due to weaker-than-expected PC sales, market share losses and a seasonal decline in the semi-custom business. The company has not been profitable in the last three years, and its net loss increased from $20 million in Q1 2014 to $180 million in Q1 2015.

While some analysts are of the view that splitting or spinning off its business is a good move, many believe that AMD is better positioned to turnaround its business if it keeps its graphics and processors businesses together and makes the most of overlap in research and development. Additionally, AMD has licensed the technology to make x86 chips from Intel, and any deal might jeopardize that agreement.

We believe that AMD is better off keeping all its segments under one roof. Simply put, the constituent businesses are not only fundamentally related, they are highly synergistic.  The company has for many years struggled to compete with Intel CPUs and Nvidia GPUs, despite making significant progress in both the markets on a number of occasions. AMD’s strength lies in its APUs, which combine the performance of its x86 microprocessors with its ARM-based graphics technology to enhance gaming, videos and multitasking features on PCs. Thus, splitting up the two businesses to turnaround its business does not make sense. Moreover, with its diversified, Intel-based and ARM-based offering, it is uniquely positioned to drive the thrust into the 20% market share many observers expect ARM-based microprocessors in the emerging market for micro-servers.  AMD has slugged away as a weak number two for years. But its competitors know well its strong engineering expertise. This micro-server opportunity may well be AMD’s next big opportunity to shine.

Though the PC market still remains lackluster, the PC gaming segment looks promising. According to Newzoo, the PC gaming platform is the largest segment (~37%) of the total gaming industry, which is valued at approximately $91.5 billion. Following AMD’s acquisition of ATI in 2006, the discrete graphics cards industry has only two key players – Nvidia and AMD. The two companies account for almost 100% of the GPU market. The market shares of the two companies have fluctuated a lot between quarters, but Nvidia still manages to retain its lead over AMD in the discrete GPU market with a 76% market share. As of February 2015, only 28.6% of Steam gamers have an AMD video card, compared to 51.8% for Nvidia, and the former’s share has declined from over 32% two years ago. ^[2]

AMD unveiled its line of next-generation Radeon graphics chips at the Electronic Entertainment Expo (E3), earlier this month. These new AMD graphics cards mark a technology turning point in PC gaming, bringing super high resolution, ground-breaking VR capabilities, exceptional experience in 4K, smoother gameplay, support for new, advanced APIs like DirectX 12 and Vulkan, and groundbreaking form factors to gamers everywhere. The reviews for these chips have been good so far, and could help AMD expand its footprint in PC gaming.

Our price estimate of $2.90 for AMD is at an approximate 10% premium to the current market price. For fiscal 2015, we expect AMD to report revenue and $5 billion and non-GAAP EPS of $0.01.

See our complete analysis for AMD

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1. Exclusive: Advanced Micron Devices mulling breakup, spinoff: sources, Reuters, June 19, 2015 [↩]
2. The End Of The Battle Between AMD And Nvidia Won’t Be Great For PC Gamers, Digital Trends, March 26, 2015 [↩]