AMD, the Best Bet in Semiconductors, Looks to Defy History

(Bloomberg) -- Advanced Micro Devices Inc. is in its fifth year of losses. Its investors started the year holding a stock down 90 percent from its peak a decade ago. Its industry-leading 27 percent stock rally in 2016 is a sign, though, that it finally might pose a threat to Intel Corp. rather than shareholder returns.

AMD is one of only three companies capable of the extreme engineering that crams billions of transistors onto postage stamp-sized squares of silicon resulting in microprocessors and graphics processors that are the main components of computers. But during most of the last decade it’s been too slow to field new products and its chips haven’t stacked up against the competition. In 2012 analysts said it was on course to run out of cash.

On April 22, those shareholders who stuck with the company through the turmoil got a payoff: The stock rallied 52 percent a day after AMD announced a deal to bring in cash from licensing technology to China.

“I don’t think anyone expected that,” said Raymond James analyst Hans Mosesmann. “It’s very disruptive potentially.”

Read more: China Server Deal Gives AMD Stock Biggest Surge in 35 Years

Lisa Su, AMD’s chief executive officer, was personally involved in the China deal. It’s a rebuke to skepticism of her plan to bring in revenue from technology licensing and given her company another source of cash that Intel can’t easily take away.

Investors and analysts like AMD’s China joint venture because it could provide the chipmaker with a path back into the lucrative server market. AMD is partnering with Tianjin Haiguang Advanced Technology Investment Co. -- which is backed by the Chinese Academy of Sciences -- to create a company that will make server parts for the Chinese market. AMD will get $293 million in licensing revenue in return for providing processor know-how. The Chinese gain access to technology that they can use to reduce their dependence on imports.

Intel, which owns some of the fundamental technology that will be transferred, is unlikely to challenge the arrangement, fearing it would risk its own right to sell chips in the world’s most populous nation, Mosesmann and others argue.

Mosesmann, a long-time AMD supporter, described the China deal as a “clear and present danger” to Intel’s hold on the lucrative server business. It’s evidence that AMD has value not appreciated by the market, he said.

But is this the sign of a turnaround or merely a short-term gain? Intel has dominated the server business for years: More than 99 percent of worldwide server processor shipments are Intel’s. In 2006, AMD’s Opteron server chip had more than 20 percent of the server market. But its follow-up, Barcelona, was late and never performed as billed, beginning the company’s slide back into obscurity in that market.

In the first three months of this year, Intel’s data center group, the division which makes server chips, produced about $1.8 billion of operating profit. AMD lost $109 million during the first quarter-- its sixth quarterly loss in a row.

Su is more up front about her company’s challenges and less prone to promise what she can’t deliver, according to Topeka Capital Markets analyst Suji De Silva.

“She’s the least hyping CEO they’ve had,” he said. The deal with China has “brought something that people had written off back to life.”

Under Su, the highest-ranking woman in the semiconductor industry, AMD is pushing into what it calls semi-custom chips. By designing products for individual customers, it’s become the heart of Microsoft Corp.’s Xbox One and Sony Corp.’s PlayStation 4. While that’s helped stabilize earnings, it still gets more than half of its revenue from the personal computer and graphics chip markets, where it’s in the cross hairs of Intel and Nvidia Corp.

In the first quarter, when worldwide PC shipments fell to their lowest level since 2007, it surprised analysts by not coughing up more market share to Intel. That helped the stock rally and caused hope its products can hold their own, particularly in graphics, where it’s lost market share to Nvidia. AMD is starting to see their long-term plan toward profitability bear fruit, Drew Prairie, a company spokesman, said in an e-mail.

Still, even shareholders who have supported it want more evidence that the improvements are sustainable. In the PC market it’s possible to create the appearance of stronger sales by shipping more products into inventory. That typically unravels in the next quarter if those chips don’t sell and unused stockpiles mount up.

The big test of whether AMD is really on the way back will come when it introduces a new design for PC processors called Zen, which the company aims to start selling next year.

“If Zen is a home run this thing probably works,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. Like many of those who’ve followed AMD for a long time, he’s not yet ready to bet that this is the beginning of a new chapter at the company. “History would suggest it’s not, but you never know.”