Advanced Micro Devices (NASDAQ: AMD) has fallen hard over the past decade. The stock peaked in early 2006, trading in excess of $40 per share at the time, only to fall below $3 per share today. The company faces a myriad of problems as it attempts to turn itself around, and returning to its former glory seems next to impossible. Here are three things causing AMD major headaches.
The Intel juggernaut
AMD competes with Intel in PC and server processors but has been bleeding share in both markets. In servers, AMD won as high as 25% market share in 2006, making it a major player in the industry. Today, AMD is essentially nonexistent in the segment, claiming a low single-digit share. Meanwhile, Intel has built a near-monopoly, allowing it to charge high prices and extract extremely high margins.
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.
During the most recently reported quarter, the AMD PC segment, which includes CPUs and graphics cards, posted a big operating loss as sales declined. The company was also forced to write off some of its processor inventory due to weak demand.
Intel manufactures its own chips, and it recently started shipping processors built with a 14-nanometer process, which provides improved power efficiency compared to previous generations of chips. AMD, after selling its foundry operations, now relies on a third party for manufacturing. All AMD products are still on a 28-nanometer process, leaving the company at a major disadvantage.
With Intel outspending AMD on research and development by more than a factor of 10, and committing more than $10 billion in capital expenditures each year to maintain its manufacturing advantage, nearly double AMD's annual revenue, it is difficult to imagine the company making any sort of comeback.
Outgunned in graphics
The second component of the PC business is graphics cards, and the company has been doing poorly in this area as well. NVIDIA, its only competitor, has been the market leader for years and has strengthened its lead in recent quarters. Over the past few years, AMD typically held on to roughly 40% of the GPU market by units. Today, this percentage has fallen to just 24%.
AMD expects to launch new products in the coming months, but NVIDIA has had the high end of the market essentially all to itself since September when it launched the GTX 970 and GTX 980. One problem is that AMD simply does not have the resources to keep up. While AMD spreads itself between PC CPUs, server CPUs, graphics cards, and its semi-custom business through which it designs chips for clients, all NVIDIA products are built around the same graphics technology. NVIDIA now spends more on research and development than AMD, which has slashed R&D spending over the past few years.
AMD does not have the resources to battle either Intel or NVIDIA, but it is actively trying to fight on two fronts in various markets. AMD will not make a comeback in any of its PC-related markets until it narrows its focus, and that does not appear to be part of the plan.
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.
During 2014, AMD posted an operating loss even before interest payments. Backing out some one-time charges, the adjusted operating profit was positive, but the $177 million in interest payments more than wiped this out.
With negative free cash flow for the past three years, AMD has had no way to pay down this debt. 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.
The business model simply is not working. The company is unable to compete with Intel, NVIDIA continues to win graphics card market share, and interest payments are wiping out any profits AMD generates from its deals to supply the chips that power major video game consoles. At this point, a turnaround seems unlikely.
This $19 trillion industry could destroy the Internet
One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism... The Economist is calling it "transformative"... But you'll probably just call it "how I made my millions." Don't be too late to the party -- click here for one stock to own when the Web goes dark.
Timothy Green owns shares of Nvidia.