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Microsoft Corporation (MSFT): This Is Why It Pays to Keep Your Faith in This Company

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n my previous article on chip-maker Advanced Micro Devices, Inc. (NYSE:AMD), I had made a quick mention of how the company attracted top-level talent in an attempt to fine-tune its efforts towards the SoC (System-on-a-Chip) integration process. And now, it seems this beleaguered tech company is on the correct path to recovery as Redmond-based Microsoft Corporation (NASDAQ:MSFT) announced that it will utilize AMD processors for its next generation Xbox game consoles.

Game on, guys!

Microsoft Corporation (MSFT)This is undoubtedly a big win for a company whose stock has taken a massive roughly 60% hit over the past year. But, what’s even more important is the fact that this completes Advanced Micro Devices, Inc. (NYSE:AMD)’s efforts directed at winning a lion’s share of the global video-game segment, valued at a whopping $67 billion. That’s because the Microsoft Corporation (NASDAQ:MSFT) announcement complements the company’s role as the supplier of processors for Sony Corporation (ADR) (NYSE:SNE)’s forthcoming PlayStation 4. That apart, AMD already has a long-standing relationship with Nintendo since 2001 that has resulted in the former supplying processors for Nintendo’s Wii U home console. All this means that AMD has now successfully partnered with all the three big names in the game console industry – Nintendo, Sony Corporation (ADR) (NYSE:SNE) and now, Microsoft Corporation (NASDAQ:MSFT), ensuring a steady inflow of future revenue.

Show me the money

And Advanced Micro Devices, Inc. (NYSE:AMD) badly needed this latest boost to its efforts to move away from the steadily declining PC industry. The company has already witnessed a steady decline of its top and bottom lines, along with a negative profit margin, as global computing trends have tended to move away from PCs and more towards smartphones and tablets. The shift has also affected AMD’s rivals Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA), but their cash positions have not been as precariously placed as with AMD.

As things stand at the moment, Advanced Micro Devices, Inc. (NYSE:AMD)’s cash pile has dwindled down to slightly more than $1 billion, and the company’s steady losses have led some market observers to predict a possible future situation of bankruptcy. As the PC industry is headed for a further downslide even this year, AMD is trying to make up for the cash shortfall by indulging in mass layoffs and also selling company assets, as highlighted by its Austin campus deal recently.

Competition’s a tough nut to crack

That apart, the company has to constantly deal with some heavy competition, with Intel Corporation (NASDAQ:INTC) being a particularly tough and dominating opponent. With almost a 96% share of global PC-based processor sales, Intel tends to dwarf Advanced Micro Devices, Inc. (NYSE:AMD) whose share is a meager 4%. And while Intel has billions of dollars to ride over the crisis and instead plan aggressive expansionary moves to counter it, AMD is obviously at a huge disadvantage.

The two companies also have totally different chip sourcing procedures. While Intel Corporation (NASDAQ:INTC) has foundries of its own that produce cutting-edge processors as per its requirements, AMD does not make its own chips and instead sources them from third-party manufacturers such as Globalfoundries Inc. and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM). The way I see it, this is a definite advantage for cash-strapped companies like AMD, as it leads to hugely reduced running costs. While there is always the risk of running into sourcing constraints, given that it has to depend on third-party suppliers, at least AMD does not have to worry about generating enough demand for its chips so as to offset the huge costs of running its own foundries like Intel.

With NVIDIA Corporation (NASDAQ:NVDA), it’s a totally different story. While admittedly NVIDIA has had a better run as far as the graphics processing unit (GPU) business is concerned, AMD’s Radeon series of processors seem to have taken a very recent lead over NVIDIA’s GeForce series. That’s because AMD’s Radeon processors are now powering Sony’s Playstation 4 as well as Microsoft’s upcoming Xbox, after having successfully displaced NVIDIA in these areas. At the same time, NVIDIA Corporation (NASDAQ:NVDA) continues to have a strong hold over the tablet market, putting AMD at a relative disadvantage.

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