uploads///Tablets

Why AMD Is Considering a Split or Spin-Off

By

Updated

AMD is considering a split or spin-off

In the prior part of the series, we discussed that AMD’s (AMD) shares suffered a severe decline due to weaker-than-expected consumer PC demand. AMD’s management is trying to take every possible step to survive in the tough chip business and declining PC market.

According to a Reuters article from June 19, AMD is contemplating whether to separate itself in two or spin off a business. One alternative is to separate AMD’s graphics and licensing business from its server business. The company’s server business sells processors used in data centers.

The above chart shows that tablets are expected to sell more than PCs globally by 2015. AMD’s x86 platform struggled to find acceptance by mobile OEM companies. Increased penetration of tablets is good news for AMD, as well as ARM Holdings (ARMH).

Article continues below advertisement

Increased competition and pricing have put AMD into a tight spot

With a market cap of more than $2 billion, AMD is finding it difficult to stay afloat in the chip market, inundated with low cost and power-efficient chips. Moreover, this space is dominated by Intel (INTC). AMD also has a cross-licensing agreement with Intel that will need a careful examination if a spin-off or separation of the company is considered. As a result of the challenging environment, AMD’s share prices took a dive. In the last year, AMD’s shares fell approximately ~40%.

Poor cash flow limits AMD’s funding in R&D

In October 2014, AMD announced layoffs of 7% of its workforce as a means to control costs. Layoffs are a common route adopted by the technology industry for cost control. To diversify from the declining PC market, AMD has also shifted its focus to high growth and high margin areas like gaming consoles, embedded solutions, and dense servers. Sony’s PlayStation 4 (SNE) and Microsoft’s Xbox One (MSFT) employ AMD’s custom-designed Jaguar chips.

AMD with its falling cash flows and limited cash reserves is finding difficult to fund research and development on new product launches and technologies. AMD’s net losses are on the rise, too. In fiscal 1Q15, AMD’s net loss touched $180 million compared to $20 million in 1Q14.

If you are bullish about Intel, you can consider investing in the PowerShares QQQ Trust (QQQ). Intel makes up about 3.41% of QQQ.

Advertisement

More From Market Realist