Restructure, accelerate, transform
Advanced Micro Devices Inc (NYSE:AMD) has already restructured operations and is now transforming itself from a supplier of PC microprocessors and graphics controllers to an SoC supplier of application-specific integrated circuits (ASICs) to PC, tablet, game console, professional graphics, embedded products and cloud server applications. New products accounted for over 30% of H213 sales, and management is targeting 50% by the end of 2015.
Q4 video game upside
Revenue grew by 9% sequentially, above expectations, to $1.6bn. Pro forma gross margin was weak at 35% on a richer mix of new video game SoCs. Pro forma EPS met expectations at $0.06, and pro forma positive free cash flow goal for H213 was achieved. Cash, equivalents and both short- and long-term marketable securities exceeded targeted $1.1bn by $100m, while debt was flat but greater at $2.1bn. Computing products declined by 9% to 45% of sales with a $7m operating loss due to consumer notebook PC weakness, while graphics and SoCs grew by 29% to 54% of sales with $121m in operating income due to video game strength from both Microsoft and Sony launches. Guidance for Q1 calls for a seasonal revenue decline of 13-19% after two quarters of both revenue growth and earnings.
Transformative growth
New products expected to drive revenue growth and profitability at Advanced Micro Devices for 2014 include continued strength from SoCs for video games to Microsoft and Sony; the new Kaveri processor for underserved desktop PCs; new low-power Beema and Mullins processors for tablets and ultrathin notebooks; new Radeon mobile discrete graphics processors to Dell, Lenovo and others; new AMD FirePro professional graphics subsystems for the Mac Pro and others; embedded offerings for digital signage, cash registers and medical devices; and cloud server offerings including SeaMicro systems and the new Seattle 64-bit ARM processor sampling this quarter.
Valuation: Upside from growth
Advanced Micro Devices is currently trading at 0.5x sales and 26.7x earnings based on 2015 estimates, as well as 5.6x book value. We believe the shares can easily trade at 1.0-2.0x sales consistent with its semiconductor peers, as the company grows revenues from new products, establishes consistent and improving profitability and lowers its debt ratio over the next few quarters.
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