The Post-PC Future for Chipmakers

The PC industry’s struggles continue. The latest evidence came from a disappointing earnings report from Advanced Micro Devices (NYSE:AMD), the chipmaker that competes with Intel (NASDAQ:INTC) to supply the CPUs that power computers.

In its fourth-quarter 2012 results, AMD reported revenue of $1.16 billion, down 9% from the previous quarter and a whopping 32% year-over-year. This resulted in an operating loss of $422 million for the quarter, or 63 cents per share.

AMD’s annual results for 2012 weren’t any better: revenue of $5.42 billion (down 17% from 2011) and a net loss of $1.18 billion ($1.60 per share). The company has been selling assets and laying off staff to cut costs, while trying to broaden its product offerings to include chips to power tablets — the devices frequently fingered as causing the PC slowdown.

Although AMD’s stock has rebounded (up 9.8%) since the numbers hit, at $2.69, it’s still down nearly 61% since this time last year, when it traded in the $6.80 range. And it’s nowhere near the $40-plus levels it hit in 2000 and again in 2006.

While AMD may be the chipmaker poster child for the PC slump, other companies are feeling the crunch, too, even those that have been more successful in expanding beyond the PC market.

Texas Instruments (NASDAQ:TXN) saw profit drop 11% in Q4, with revenue taking a 13% hit. For the year, revenue was down 7%, and net income was 21% lower, even though TI isn’t as reliant on the PC industry. While it makes controllers for PC components such as disk drives, it has also branched into mobile CPUs and expanded its investment in embedded chips used in automotive and other applications. Of TI’s divisions, only that Embedded Processing group managed a positive performance last quarter.

Intel had a similar story earlier in the month. Quarterly earnings were down 26% year-over-year and revenue was off by 3%.

The PC market is soft — and that’s not changing any time soon, if ever. But things were probably made worse in the fourth quarter by slower-than-expected Windows 8 sales as consumers and businesses held off on upgrading. Gartner says worldwide PC sales were down 4.9% in the quarter.

The video game market is also in turmoil as console makers prepare for the next-generation battle. Nintendo started the brawl with its Wii U launch in late 2012, while Sony (NYSE:SNE) and Microsoft (NADSDAQ:MSFT) are expected to release their latest consoles this year. But mobile gaming with tablets and smartphones has been disrupting the industry, and now new entrants like Nvidia (NASDAQ:NVDA) are muscling in with their own hardware to take on the established players.

While a hurting PC market has an effect on anyone that makes PC components, disruption in both PCs and video games is a double whammy for a company like AMD that focuses primarily on CPUs and graphics cards.

Even mobile is getting tougher. Although the segment is growing wildly, consolidation is taking place. Smartphone and tablet manufacturers are looking to the big CPU makers like Qualcomm (NASDAQ:QCOM), Samsung and Nvidia, which are pushing out the smaller players. TI acknowledged as much last year when it announced it would begin shifting away from that market. Intel is still trying to crack mobile (no matter how tough, it’s more promising than PCs), but it’s facing an uphill battle.

If the PC market is slumping and mobile is more or less locked up, do manufacturers that are focused on consumer electronics still have growth opportunities? Two areas that come to mind are embedded processors and LED lighting.

The Internet of things” is growing into a big movement, with embedded processors showing up in everything from home appliances to cars. These sensors and processors measure data, communicate and provide the opportunity to interact with objects. Everything is getting “smarter,” thanks to embedded processors, and TI is positioning itself to take advantage of a coming boom. Embedded Processing is now TI’s second largest division ($469 million revenue in Q4), and its profit was up 33% last quarter.

LED lighting is a technology that’s been around for a while, but it appears ready to hit prime time. As energy costs increase and the cost of LED technology decreases, demand for LED lighting is ramping up.

Look no further than trendsetter Apple (NASDAQ:AAPL), which snapped up exclusive distribution rights for the Philips (NYSE:PHG) Hue programmable LED lighting kit (which combines embedded processors and LED lighting). The Hue starter kit was backordered for three months after launch in late 2012, despite its $200 price.

And yesterday, Cree (NASDAQ:CREE) the North Carolina LED lighting and embedded-chip manufacturer, delivered a stellar quarterly earnings report, with profits up 69%, handily beating expectations. At the time of writing, CREE was trading at $40.62, up 21.45% on the day.

For a growth tech stock, don’t look to companies that rely on the PC market and recognize that while mobile is hot, it has room for only so many players. Look instead toward technologies like embedded processors and LED lighting, where companies — and investors — can still get in early.

As of this writing, Brad Moon didn’t own any securities mentioned here.

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