Don’t Be Fooled by Advanced Micro Devices’ Progress

It may look like Advanced Micro Devices (AMD) is a completely different company under the leadership of new CEO Lisa Su. The company has positively surprised investors several times over the last few months and even delivered robust quarterly results for the second time in a row.

This was all possible due to the launch of its new Polaris architecture. Despite Advanced Micro Devices’ recent gains, debt analysis points out bad news for the company’s prospect. The company has a long term debt load of around $2.14 billion with maturities beginning in 2019.

It is mandatory for the company to repay $600 million in 2019 as well as $450 million in 2020.
With prevailing total cash of just $957 million, Advanced Micro Devices has approximately three years to produce $1.05 billion in cash to repay the first installment of its long-term debt.

Not only this, the company also has to develop new chips to sustain in the extremely competitive market. Advanced Micro Devices currently faces tough competition from NVIDIA and Intel in terms of GPU and CPU market. NVIDIA has a lot of advantage over Advanced Micro Devices mainly because NVIDIA has a lot of cash.

As an outcome, Advanced Micro Devices could not produce any free cash flow in the past four years, and it is necessary for the company to become cash flow positive next year to safeguard its prospect.
Don’t Be Fooled by Advanced Micro Devices’ Progress
Image by Republica / Pixabay
This clearly shows that the company might have very tough times ahead.

Advanced Micro Devices’ last hope is its new upcoming Zen architecture. However, it cannot be certainly said that the launch of Zen architecture will take back the company on the path of profitability because Zen will need to capture substantial market shares along with high margins.

On the other hand, Intel is also on its way to launch its new mainstream and enthusiast platforms. Intel’s new Kaby Lake chips will be launched in the market in the late second half of this year. Moreover, Intel will also launch Apollo Lake processors which are comparatively cheap as compared to Kaby lake based processors.

More significantly, Intel has also planned to launch new 10 nm 8th generations Cannonlake CPUs next year. Intel’s launch line up clearly states that it will provide tough competition to Advanced Micro Devices.

Given the intensive competition and Advanced Micro Devices’ limitations, it will be very difficult for the company to meet its debt deadlines. Thus, I think long-term prospects of the company are still weak.

Disclosure: I do not hold any position in the stocks mentioned above.
Published on Aug 16, 2016
By Prudent Investor

Copyrighted 2020. Content published with author's permission.

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