AMD CASE

AMD, once major rival to Intel and Nvidia, is facing major problems last couple of years. The once giant is going near bankruptcy as it is losing market share to its competitors in both segments of IT industry, where AMD is present (Micro processors and GPU). In the last 5 years, AMD recorded 4 annual loses in a row. In 2016 situation didnt change drastically, as the Sunnyvale based company recorded yet another loss. The future of the company seems not as bright as it was considered in 2006 and 2007, when AMDs stock peaked 40$ per share and was holding 25% of market share in micro processors industry.

Background information

AMD (Advanced Micro Devices) American multinational semiconductor company based in Sunnyvale, California. The company develops technologies used in consumer and business markets. The main products are: x-86 based microprocessors, graphic processing units (After acquiring ATI in 2006) and accelerated processing units.

AMD was founded by Jerry Sanders, who used to work for Fairchild Semiconductor. After getting frustrated by lack of support from Fairchild, Sanders and his 7 peers decided to start new company.

In 1969, September AMD decided to move in to Sunnyvale (Now Headquarter). Initially company operated as second source supplier for microchips made by Fairchild and National Semiconductors. That and guaranteed quality control from US military gave company edge in the industry, as the company solved the problem of unreliability.

During the same AMD produced their first products the Am9300 shift register and the Am2501 logic counter. Product was successful and had future modifications. Its best selling product was the Am2505 (Modified version of 1971).

We can say that 1971 was truly breakout year for AMD, as the company increased sales volume and its total annual sales reached $4.6 million. Also that year AMD entered RAM chip market with Am3101, a 64-bit bipolar chip.

From 1972 till 1979 continued their growth. During that period of time company went public, entered microprocessors market after Intel, entered into a cross licensing agreement with Intel, joint venture with Siemens and etc.

In 1978 total sales topped $100 million and in 1979 debuted in New York Stock Exchange. In 1980 AMD started to supply semiconductor products for telecommunications.

In the 80s and 90s and early 00s AMD was considered among the best companies to work for and in revenues (The 100 Best Companies to Work for in America 1984;Fortune 500 1985). The company was growing rapidly, producing innovative technologies, generating revenue and expanding their business model.

In 2006 AMD acquired ATI technologies. That acquisition helped AMD to compete against Nvidia in GPU segment.

In 2008 established new joint venture called GlobalFoundaries Inc with Mubadala Investment Company. The partnership and spin-off gave AMD an infusion of cash and allowed AMD to focus solely on chip design.

In 2011 and 2012 company had a decline in sales and had to lay off its workforce to reduce the costs (10% - 1400 employees in 2011 and additional 15% in 2012)

In early 2012 company acquired low power server manufacturer SeaMicro to bring out ARM architecture server chip.

In 2014, AMD announced a new restructuring plan. As a part of restructuring AMD announced to lay off 7% of workforce globally.

Situations

With the quick look at AMDs financial statements, we can find out that company is in serious trouble. In 2015 AMDs revenue dropped 28% in PC market. The company recorded 660 million usd net losses with 3.99 billion usd revenue. In total it was 4^th annual loss in a row. AMDs book value turned negative. In 2016 AMD was not fairing much better. The company recorded net loss of 497 million usd with revenue of 4.27 million usd.

Generally speaking, the reasons for AMDs situation are: strong competition, crippling debts.

The competition:

The IT world is very competitive with tough entry mode. Usually the IT market is dominated by one company and the others are trying to catch up. This is the case here. In the beginning AMD had 25% of market share in processors. However, now AMD is almost non-existent in that segment, only claiming a single-digit share. Now Intel is near monopoly.

In PCs, the story is much the same. Intel has continued to steal market share from AMD, especially at the low end with its Atom chips, despite already controlling most of the segment. During the second quarter of 2014, Intel generated nearly 95% of PC processor revenue, shipping 84% of all desktop processors and 88% of all laptop processors.

Also Intel is outspending AMD in R&D department by more than a factor of 10. Which is making AMDs situation much tougher.

In GPU segment, the story is almost same. Couple years ago AMD had 40% of GPU market, now only 24%. AMD is not able to compete against Nvidia, simply because of lack of resources to do so. NVIDIA currently dominates the graphics card market, shipping around 80% of cards. The company sports a market capitalization of just $2.8 billion, down more than 80% over the past decade

Crippling debt:

One of the major problems, AMD is facing now is paying back the debts, the company have required. Because of negative cash flow, AMD is not able pay off its debts and interest is rising. Back when AMD was profitable, paying interest on its more than $2 billion in debt was not a problem. But as profits have declined, that interest has become a major thorn in its side..

Capital structure

As we can see, the current situation is not much better. Company is still in huge debts and too risky to invest in. And without much of a plan to bring its PC business out of the doldrums, there is not much reason to believe free cash flow will turn positive anytime soon. Debt levels will remain high, and the interest will continue to impede AMD's ability to turn a profit

AMD vs Intel

This graph shows us market share of AMD and Intels market share in processors segment throughout the time. Right now Intel has 77.7% of market share, thus leaving AMD far behind.

In 2006 AMD was very close to catch Intel, gaining 48.4% of market share, however, right now AMD had lost roughly 26.1% of market share, currently holding only less than a half of what they used to.

The main reason for the loss is that AMD was not able to gain competitive advantage on Intel. (Introducing inferior products compared to Intel).

	Intel financial ratios
			AMD financial ratios

If we compare both companies financial ratios, we can see that AMD is doing better in liquidity than the previous year, while Intel has little struggles. However, in profitability ratios, AMD is showing not only numbers worse than a previous year, but also lower than industry average.

When it comes to the net income, AMD is recording yet another loss with $497 million, while Intel recorded $10.3 billion (9% down compared to 2015).Operating income: $12.9 billion (Intel); -$440 million (AMD).

In R&D budget for 2016, AMD is inferior both to Intel and Nvidia. Another reason why AMD is trailing behind in both segments.

Nvidia and Intel are outsourcing AMD, and because of that AMD is not able to catch up. Thus making AMD more volatile than Intel in the stock.

( Risky to invest with Beta coefficient: 3.06 vs Intels 1.17)

AMD vs Nvidia

We all know that AMD always struggled against Intel. however they were holding better grounds against Nvidia. Recently, that changed as well.

For some time, the trend line has around a 60/40 split in favor of Nvidia with bumps up and down, and Intel eating a little of the market share as each generation of Core processors sports a better GPU.

In 2014 Nvidia introduced Maxwell architecture and the GTX 980 and GTX 970. Both cards were for High-end segment and AMD had no answers against that products. Also, the shift in gaming industry towards 4k resolution didnt help either, because of that Nvidia had better options to offer. The results are ugly, as AMD lost almost 20% of market share within a year. The quarterly earnings aren't pretty, either. For the three months ended June 28, 2014, CPU and GPU sales totaled $828 million. For this year, with the quarter ending June 27, CPU and GPU sales were just $379 million.

	Nvidia financial ratios

Upon looking into the financial ratios, we can say that Nvidia is unreachable for current AMD.

Company generates more profit, has better liquidity and is able to spend more on different kind of investments (r&d, equipment and etc.).

We also can see that companys strategy is working really well, as compared to previous year; Nvidia increased its liquidity and profitability ratios (81% and 36%). (In my opinion company should invest more to gain better efficiency).

Net income for Nvidia was recorded $1.67 billion, 63% increase compare to the previous year. $1.9 billion of operating income, roughly 61% increase.

Compared to AMD company is less volatile with beta coefficient 1.24. As it was mentioned earlier, company has better overall standing in the industry and has better investment opportunities than AMD in GPU sector and the biggest market share as well.

If nothing drastic happens, AMD wont be able to compete against Nvidia in the nearest future.

Conclusion

AMD currently is in very difficult situation. The strategy and business model is not working as it should have expected, thus company is balancing near the edge with bankruptcy. Recent, slight increases in stock means nothing; however lets believe that the company will find out the solutions for its problems.

Bibliography:

Article title:	Intel Reports Record Full-Year Revenue of $59.4 Billion; Reports Record Quarterly Revenue of $16.4 Billion
Website title:	Intc.com
URL:	https://www.intc.com/investor-relations/investor-education-and-news/investor-news/press-release-details/2017/Intel-Reports-Record-Full-Year-Revenue-of-594-Billion-Reports-Record-Quarterly-Revenue-of-164-Billion/default.aspx

Article title:	NVDA Key Financial Ratios
Website title:	NASDAQ.com
URL:	http://www.nasdaq.com/symbol/nvda/financials?query=ratios

Article title:	Financial Statements - NVIDIA Corporation
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Article title:	NVDA | Stocks Price Quote for Nvidia Corporation
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Article title:	Fundamentals - Annual Income Statement | Investor Relations | AMD
Website title:	Ir.amd.com
URL:	http://ir.amd.com/phoenix.zhtml?c=74093&p=irol-fundIncomeA

Article title:	${Instrument_CompanyName} ${Instrument_Ric} Company Profile | Reuters.com
Website title:	Reuters
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Article title:	Annual Report and Proxy | Investor Relations | AMD
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Article title:	Our History
Website title:	Amd.com
URL:	http://www.amd.com/en-us/who-we-are/corporate-information/history

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