Console Bet Is Played Out at AMD

November 20, 2013 Leave a comment

Console Bet Is Played Out at AMD

DAN GALLAGHER

Nov. 18, 2013 3:49 p.m. ET

Prospects for Advanced Micro Devices AMD -0.86% have become closely tied to new videogame consoles hitting the market this month. But the chip maker remains tethered to the personal-computer market. Sony said it sold one million units of its PlayStation 4 console in the U.S. and Canada in the first 24 hours following its launch late last week. Microsoft‘s MSFT -1.69% Xbox One goes on sale Friday. Both use a customized version of AMD’s Jaguar chip family.AMD was benefiting from the new consoles even before they launched. The company surprised investors last month with a 15% year-over-year jump in revenue that came from gains in its business unit that includes the new console chips. This helped offset a slump in its PC business, where revenue slid 15%.

The company is pushing to diversify revenue. Revenue from the PC category was 64% of total revenue in the first nine months of 2013, down from 74% a year earlier. Even so, PCs will likely account for a majority of total revenue for the foreseeable future.

It has been seven years since the last PlayStation hit the market. Pent-up demand and the holiday season have sparked a big launch. Sales, though, are likely to ebb as 2014 progresses. If so, that could pose problems given Wall Street forecasts AMD’s revenue will increase 11% next year.

Another issue is AMD’s commitment to GlobalFoundries, the chip-fabrication business it spun off in 2009. AMD will owe about $404 million to GlobalFoundries under a “wafer-supply agreement” in the current quarter and another $250 million in the first quarter of 2014. AMD said on its last earnings call that it expects to meet this obligation.

Yet chips for the newest game consoles are made by another fab partner. So sales of higher-end PC and server chips made by GlobalFoundries may come up short.

With the stock trading at about 33 times projected 2014 earnings, investors may want to cash in some of their chips.

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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