AMD’s Console Wins Not Enough to Offset PC Drag

on May 17, 2013

Advanced Micro Devices Inc. (NYSE:AMD) has been the best performer in the Standard & Poor’s 500 Index in the past month thanks to orders for video-game consoles but the semiconductor manufacturer should look elsewhere to make up for the global slump in PC sales.

Orders from video-game consoles manufacturers had lifted the AMD share price by 83 percent since April 15 through May 15 but the winning streak ended on Thursday, May 16 after Goldman Sachs’ analyst James Covello cut his rating on the shares to sell, on concerns over AMD’s declining performance in the company’s core PC chip business. The AMD share price nosedived nearly 13 percent to $3.83 at the close in New York on Thursday, its biggest daily decline since October 19, 2012.

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AMD’s recent rally has been spurred by Sony Corp.’s decision to use AMD chips in the latest version of its game console – the Playstation 4. The semiconductor manufacturer, reportedly, has also been picked by Microsoft Corp. to provide chips for the new version of Xbox – Microsoft’s own gaming machine. With the decline in the global PC market now in its second year, AMD is trying to diversify to other markets in a bid to get 20 percent of sales from outside the PC business by the end of 2013.

But while consoles may help the company’s annual sales significantly – by providing a potential revenue boost of $700 million to $1.4 billion according to Stacy Rasgon, an analyst at Sanford C. Bernstein & Co. – they still represent a market that’s nearly one-tenth of the size of the global PC industry by shipments.
Therefore, game console wins may not be enough to make up for the decline in sales in the PC segment.

“I’m really worried about the core business,” Rasgon has said, as quoted by Bloomberg. “They’ve actually lost more than a billion dollars from their core business over the last two years. Does that stop? I’m not sure.”
The same concern was cited by Goldman Sachs’ Covello as the reason for the downgrade of the AMD stock. “We expect continued disappointing results in the PC segment to mitigate the impact of increased revenue from gaming,” Covello wrote in a report.

Revenue generated by AMD’s computer-chip division declined nine percent in the first quarter, compared with the previous three-month period. Analysts on average forecast that overall sales will fall 13 percent this year, to $4.7 billion, according to data compiled by Bloomberg. Last year, total revenue decreased by 17 percent.
**Bright spots**
Not all analysts, however, have such a gloomy outlook for the company. Mark Lipacis at Jefferies LLC has pointed to the new line of processors for notebooks that can help AMD take market share away from US rival Intel Corp. Lipacis has also noted that AMD has an opportunity to siphon sales from rival graphics-chip maker Nvidia Corp.
!m[US Chipmaker’s Stock Plunges after Goldman Sachs Cuts Rating](/uploads/story/2348/thumbs/pic1_inline.jpg)
Another area where AMD expects to see success in the future is the rapidly growing market for embedded processors – chips employed in home appliances such as refrigerators and washing machines, industrial machines and medical devices. The company’s CEO Rory Read told analysts and investors last month that the company was aiming to generate as much as 50 percent of its sales from this and other fast growing markets in the “next two to three years”.
**The AMD share price (pre-market) was $3.92 as of 14.28 GMT, 17.05.2013**


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