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Intel Corporation (INTC), Advanced Micro Devices, Inc. (AMD): This Underdog is Just Another Dog

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Advanced Micro Devices, Inc. (NYSE:AMD) is fading fast. The Santa Clara, California-based company, which once nearly tied Intel Corporation (NASDAQ:INTC)’s market share for dominance of the CPU market, has lost nearly 60% of its market value over the past five years.

Advanced Micro Devices, Inc. (AMD)

To diversify away from the CPU market, AMD branched out into the GPU (graphics processing unit) business – a market dominated by industry leader NVIDIA Corporation (NASDAQ:NVDA). Unfortunately, Nvidia has proven to be a formidable opponent, and now Advanced Micro Devices, Inc. (NYSE:AMD) is fighting a losing war on two fronts – in microprocessors against Intel Corporation (NASDAQ:INTC) and in graphics processing units against Nvidia.

Meanwhile, AMD’s coffers are running dry, as negative profit margins and plunging top and bottom line growth have crippled the company over the past five years. However, the pain has just begun for AMD shareholders, and I believe that the company will need a miracle to survive 2013 without going bankrupt. Let’s analyze the major problems facing this beleaguered former tech giant today.

Losing the war on two fronts

AMD first entered the graphics processing unit business in 2006 with its acquisition of ATI Technologies, which it acquired to manufacture graphics cards as well as CPUs with integrated graphics. The $5.6 billion acquisition, split into a $2 billion loan and 56 million shares of AMD stock, was the largest in Advanced Micro Devices, Inc. (NYSE:AMD)’s history, but the company considered it a crucial strategy to control a niche market in the face of Intel Corporation (NASDAQ:INTC)’s dominance of the x86 processor market.

In the standalone graphics cards market, AMD released the Radeon series to compete with NVIDIA Corporation (NASDAQ:NVDA)’s flagship GeForce cards. To compete with Intel, which was offering CPUs with integrated graphics processors built with licensed Nvidia technology, AMD released its Fusion series.

Unfortunately, AMD has been fighting a losing battle on both fronts. In the first quarter of 2013, AMD’s graphics card market share declined from 36.3% to 35.7% year-over-year, while Nvidia’s share rose from 63.4% to 65.7%.

Meanwhile, Advanced Micro Devices, Inc. (NYSE:AMD)’s share of the CPU market plunged to 16.70%, down from 27.70% a year earlier. Meanwhile, Intel Corporation (NASDAQ:INTC)’s CPU market share rose from 72.30% to 83.30% over the same period.

Nvidia turns lemons into lemonade

Even worse, AMD lost its once dominant position in notebook computers, which require more compact, energy-efficient graphics solutions. Between the third quarters of 2011 and 2012, AMD’s share of the notebook graphics business plunged from 52% to 34%, while Nvidia’s share rose from 49% to 66%.

To achieve this growth, Nvidia turned lemons into lemonade. Initial reviews of its Fermi cards, which started with the GeForce 400 series in 2010, were slightly negative due to its lower performance-per-watt compared to Advanced Micro Devices, Inc. (NYSE:AMD)’s Radeon cards. However, Nvidia retooled the technology to emphasize higher power efficiency on mobile platforms, which generally value battery life over peak performance, and its strategy paid off.

As a result, Nvidia’s top and bottom lines, as well as margins, have grown at a healthy rate over the past three years.

Nvidia’s strength in both PCs and notebooks has also given it roughly double the revenue of AMD’s graphics processing unit segment.

Costly battles

In a nutshell, Advanced Micro Devices, Inc. (NYSE:AMD) is fighting an increasingly expensive losing battle against two industry behemoths, while continuing to cede market share in both graphics cards and CPUs. At this rate, AMD’s weak financials might just endanger its future. Just how scary are the numbers?

With only $1 billion in cash, AMD is shouldering $2.04 billion in debt with a negative cash flow of $471 million, down 180.7% over the past three years. Meanwhile, expenses have risen 31.97% to a whopping $6.60 billion.

AMD has to post some strong top and bottom line growth to get out of this rut. However, those trends have been overwhelmingly negative over the past three years.

AMD’s top line declined 16.51% over the past three years, while its bottom line has dropped 350%. Operating and profit margins, which are both negative, have plunged 249.1% and 280.1%, respectively, with no signs of improvement.

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