Advanced Micro Devices, Inc. (AMD): Can Game Consoles Save It?

Console makers have also added much PC functionality in an effort to make consoles even more attractive as PC substitutes, including HD movie playback and download, and Internet connectivity to online content stores and social networking.  For many consumers with smartphones and tablets, the console may be the only non-mobile computing asset they need or want.

The console bottom line

Can the console business make AMD profitable again?  Probably.  To analyze the question I put together a “what if” spreadsheet model to calculate the impact of console APU sales to AMD’s bottom line.  The table below summarizes the results:

For next gen game consoles to arrive on store shelves in time for the holidays, AMD would need to start manufacturing console APUs in Q2, so the above model looks at Q2 compared to 2012 Q4, the last quarter for which I have AMD data.  I apply the best current guess of AMD market share to estimate unit sales of AMD PC chipsets.  From this I get an average selling price. For the ASP of the console ASUs, I discount the chipset selling price by 25%.

For console sales volume I use the historical sales figures for Xbox 360 and Playstation3 of 75.9 and 77 million, respectively.  This works out to an average sales rate of about 10 million units/year for each platform, and then I assume that sales of the next generation consoles will do at least as well.  With an average APU selling price of $40, this could contribute about $800 million a year in revenue.  Given a projected further decline in PC sales, this could add as much as 30% to AMD’s Computing Solutions revenues.

The gross margin in 2012 Q4 deteriorated badly to 21.47% largely due to renegotiated supply contracts with Global Foundries and inventory write-downs.  AMD management has stated that they expect the gross margin to return to 41%, so this is the margin I assumed.  Although it certainly appears that AMD’s Computing Solutions segment could return to profitability based on improved gross margin and the revenue stream from console APUs, I don’t try to project operating income, but I may be able to do this once I look over AMD’s 2013 Q1 results.

There are still many unknowns, not the least of which is whether or not AMD’s overall PC chipset sales will continue to deteriorate and how fast.  But the console wins are big and could make the difference for AMD in 2013 and beyond.  If you’re looking for a high risk/high return turnaround investment, AMD might be the one.  After AMD’s earnings report on April 18, I’ll revisit the model and try to close out some of the remaining unknowns. Stay tuned.

The article Can Game Consoles Save AMD? originally appeared on Fool.com and is written by Mark Hibben.

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