Flexibility Could Be the Key for AMD

Chip maker AMD (NYS: AMD) has plunged into the red, reporting heavy losses in its first quarter. This is largely attributable to a one-time charge of $703 million related to its recently divested stake and restructured agreement with GlobalFoundries, AMD's manufacturing partner. Nevertheless, the company's market share in the x86 processor space went up to 19.1% this year from 18.2% in the prior-year quarter.

So why did AMD renegotiate its deal with and dump its remaining stake in GlobalFoundries in the first place? Here's the background...

Change in agreement
Investors tracking the industry know that AMD and GlobalFoundries have had quite a bumpy relationship. AMD had to contend with a number of problems, including supply shortages of its 32-nanometer chips made by GlobalFoundries. Keeping that in mind, the divestment effectively means that AMD now has greater freedom to outsource its chip manufacturing process elsewhere, and possibly address any delays in the process.

At the same time, this also terminates the exclusive arrangement the company had with GlobalFoundries for the manufacturing of its next-generation 28-nanometer-based processors. Speaking of which, AMD seems to be quite happy with the progress of its other manufacturing partner, Taiwan Semiconductor Manufacturing (NYS: TSM) , and its ability to churn out 28-nanometer graphics processors, which should take care of any investor-related concerns.

But as AMD irons out issues pertaining to the production side of its business, it's also scouting for newer avenues for revenue generation.

Going micro
Cloud data centers and Internet giants such as Facebook are increasingly demanding extremely power-efficient servers, which are referred to as micro servers. AMD is doing its best to make further inroads into the specialized micro-server market and started off through its recent acquisition of SeaMicro. But AMD isn't alone in the micro-server race.

Peer Intel (NAS: INTC) may be focusing much of its energy right now in the mobile processor space with its Medfield line of chips. But it's certainly not ignoring the growing potential of the micro-server market. At a developer forum in Beijing, the chip giant unveiled its plans to introduce a low-power Atom-based chip named Centerton that would target the micro-server market. While Intel may have the financial muscle to maintain its own manufacturing facilities, it makes sense for a smaller company like AMD to do all the designing instead of taking on the burden of running a manufacturing facility itself.

However, in my opinion, the most serious threat in this space might come from ARM Holdings (NAS: ARMH) , the undisputed king of mobile processor architecture. The company could certainly use its low-power chip designs to dominate the micro-server market.

The Foolish bottom line
AMD might be reeling from a near-term hit due to its divestment of GlobalFoundries. But then, the move definitely makes sense in the long run. Even S&P seems quite happy, as it recently lifted AMD's credit rating to "BB-" from the earlier "B+," citing improved financial conditions and prospects of better revenue and earnings in the foreseeable future.

AMD's newfound manufacturing flexibility and its foray into micro servers provides some compelling near-term opportunities for the company. We've found another emerging technology that just might change the face of manufacturing worldwide. You can find out what it is and how to invest in this innovative trend by checking out our free video report. Get it while it's still available! Also, don't forget to stay up to speed with the latest on AMD by adding it to your free Watchlist.

At the time thisarticle was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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