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Advanced Micro Devices, Inc. (AMD) Slumps as Micron Technology, Inc. (MU) Results Show Weakness in PC Market 

Last week was quite a roller coaster ride for Advanced Micro Devices, Inc. (NASDAQ:AMD).

On Monday, the shares climbed 1.56% to $2.62 following Reuters’ report that the company is planning to split itself in two or spin off a business.

Four days later, on Friday, its shares fell 4.26% to $2.47 and this time it was because of Micron Technology, Inc. (NASDAQ:MU).

Why Micron?

It seems that all is not well with Micron. The memory chip maker failed to continue the impressive financial performance recorded in the first half of fiscal 2015 into the second.

Management blamed the sluggish demand for personal computers (PCs) and lower Dynamic Random Access Memory (DRAM) selling prices for the disappointing performance. Micron witnessed a 10% sequential decline in DRAM prices, while volumes remained flat. DRAMs are memory chips used in PCs.

Furthermore, Micron anticipates that the abovementioned factors will continue to negatively impact its financial performance in the fourth quarter. Therefore, it has issued tepid revenue guidance for the upcoming quarter. The company expects revenues in the range of $3.45 billion to $3.70 billion (mid-point $3.575 billion), lower than the Zacks Consensus Estimate of $4.193 billion.

Why Does it Affect Advanced Micro?

Advanced Micro has two reportable segments, Computing and Graphics (focused on the traditional PC market) and Enterprise, Embedded and Semi-Custom, (focused on adjacent high-growth opportunities).

The Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment generated revenues of $3.1 billion in 2014 (56% of the total revenue). The traditional computing market accounts for the majority of its revenues.

Advanced Micro Devices stumbled on the heels of Micron’s lowered PC sales forecasts. Just like Intel, Advanced Micro also faces serious revenue challenges if PC sales weaken in the coming months.

Our Take

The persistent weakness in the PC market has led the company to increase investments in its embedded business.

Advanced Micro expects the total addressable market for its high-performance embedded SOCs and processors to be $9 billion and therefore is trying to increase its share in this market by delivering competitive products.

It is also targeting the communications, industrial and gaming segments of the market where it has secured some important design wins.

It also resorted to restructuring actions to align costs with the changing demand.

According to Reuters, Advanced Micro Devices has asked a consulting firm to evaluate the possible scenarios in case it decides to split into two separate businesses, or spin-off one of its businesses. While no details about these plans were available, there has been some conjecture that the company may be thinking of separating its graphics and computing businesses. The graphics side is the stronger of the two and AMD even introduced an encouraging new GPU at E3. But the business might need more investments and focus, which is why some analysts are rooting for the split.

Generally, when a company takes a step toward a split or spin-off, it is advantageous for shareholders. According to Insider Monkey  “with the general train-of-thought being that separated, “pure-play” businesses tend to be valued more aggressively by the market than they are as cogs of a greater wheel.”

Advanced Micro currently has a Zacks Rank #2 (Buy).

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