Advanced Micro Devices, Inc. (NASDAQ:AMD) share price touched new all-time high, led by strong sales in 2Q2016. However, just going by the sales growth doesn’t seem to be a fair approach. The company has not posed a dime since long and the situation is not going to change anytime soon.
In 2Q2016, Advanced Micro posted sales growth of 23% QoQ to $1027 million. Analyzing segment-wise, Computing & Graphics sales declined 5% to $435 million and EE&SC sales jumped 59% to $592 million. On the bottom line, the firm’s net income came at $69 million, due to $150 million gain realized from the deal with Nantong Fujitsu Microelectronics Co. On paper, these figures look impressively good.
However, it should be noted that total sales declined to $1027 million in 2Q2016 from $1600 million in 4Q2013. Gross margin stood at over 40% in 1Q2013 and more than 35% in 3Q2014. In 1Q2016, gross margin dropped 1 basis point to 30% due to improved mix from EE&SC, which has lower margins over traditional CPU/GPU chips.
It is evident that Advanced Micro is replacing a low growth/high margin business by a high growth/ low margin/ business. This approach doesn’t seems best but then there was no other option in the challenging market condition. Increased competition on the GPU/CPU side from NVIDIA Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC) together with a deteriorating PC business, unsurprisingly prompts company to focus on other prospects with less competition.
Conversely, these Semi Custom contracts, while good, had lower margins, which cannot recompense for the C&G division decline. However, the gaming console contract allows company to survive and get some time to execute their turnaround strategy. Advanced Micro cost structure is too high to earn profits and is expected to stay the same in the near future. Moreover, the company has interest expense worth $40 million to pay each quarter.