Impact Of AMD’s Fusion Chips

According to iSuppli, about 80% of PCs shipped in 2014 are expected to have hybrid chips. AMD (NYSE:AMD) recently shipped its first chips combining graphics and microprocessor capabilities in a single chip. Intel is close behind with a similar hybrid chip. Such hybrid chips mean a loss of business for NVIDIA (NASDAQ:NVDA) as they can render low-end graphic chips obsolete. But for now, both AMD and NVIDIA posted strong results.
NVIDIA’s Financials
NVIDIA (NASDAQ:NVDA) recently reported third quarter results in line with analyst estimates. Third quarter revenue was $843.9 million, down 6.6% y-o-y and up 4% q-o-q. The company swung to a profit of $84.9 million or $0.15 per share from a loss of $141 million or $0.25 per share last quarter. Net income in last year’s third quarter was $107.6 million or $0.19 per share. Analysts expected earnings of $0.15 per share on revenue of $844 million. Gross margin increased to 45.6% from 16.6% last quarter and 43.4% last year.

For the fourth quarter, NVIDIA said that it expects revenue to be up 3% to 5% from the third quarter, implying a range of $869 million to $886 million. Gross margin is expected to be flat with the third quarter. The stock is trading around $14 with market cap of about $8 billion. It hit a 52-week high of $18.78 on December 30 of last year and a 52-week low of $8.65 on August 12 following its poor second quarter results.

AMD’s Financials

AMD (NYSE:AMD) reported third quarter revenue of $1.62 billion, up 16% y-o-y and down 2% q-o-q in line with analyst estimates. Net loss was $118 million or $0.17 per share compared to a loss of $128 million or $0.18 per share last year and loss of $43 million or $0.06 per share last quarter. On a non-GAAP basis, AMD made a profit of $108 million or $0.15 per share, beating analyst estimates of $0.06 per share. Gross margin was 46% compared to 45% in the previous quarter, and the company ended the second quarter with $1.73 billion in cash and equivalents.

Computing solutions revenue increased 13% y-o-y driven by record notebook microprocessor unit shipments. Graphics revenue increased 33% y-o-y. For the fourth quarter, AMD expects revenue to be flat sequentially. It is currently trading around $7 with market cap of about $5 billion. It hit a 52-week high of $9.95 on December 24 last year. The shipping of Fusion chips has not affected its stock price much because even Intel is expected to ship its hybrid chip early next year.

Fusion Chips and Their Impact

Early in November, Dean Takahashi of VentureBeat reported that AMD shipped its first Fusion chips, which combine graphics and microprocessor capabilities in a single chip. The Fusion chips could well usher in a new era for AMD. Intel has also announced its version of a hybrid chip, Sandy Bridge, that integrates graphics and video processing. However, Sandy Bridge does not support Apple’s Open Computing Language (OpenCL). Arik Hesseldahl of Businessweek reported earlier that Apple is rumored to be interested in using Fusion instead of Intel CPUs in Macs since Fusion will support OpenCL.

Currently, Apple uses only Intel CPUs in its Macs and it uses AMD’s Radeon graphics chips in certain models of the iMac and Mac Pro. Hybrid chips could lead to a new era of smaller computing devices and higher performance. The lack of support for OpenCL in Sandy Bridge means that the Apple is left with only Fusion as an option for hybrid chips. From what we know of Apple, it likes integrated, miniaturized electronics and packs a lot of punch in small form factors. So, there is a fair chance that AMD might win some business from Apple. This would bring loss of Apple business to not just Intel but also NVIDIA.

Hybrid chips like Fusion or “Llano” and Sandy Bridge will threaten the entry-level graphics market but perhaps not the high-end market. Meanwhile, NVIDIA is betting on the smartphone and tablet market with its Tegra chips. It has design wins for LG’s Optimus smartphones as well as Toshiba’s Android-based tablets. But if the Fusion chip is a hit, it might also hurt NVIDIA’s tablet business.