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Advanced Micro Devices Inc. (AMD - Analyst Report) surged 11.8% to $4.45 as several analysts upgraded the stock’s ratings and price targets following its chip supply deals with Sony (SNE - Snapshot Report) and Microsoft (MSFT - Analyst Report).

Advanced Micro has been providing chips for game consoles to lower its dependence on the declining personal computer market. The newly launched PlayStation 4 and new Xbox One video game consoles will feature its processor.

AMD’s graphics business remains sluggish. While the graphics market itself has not done too well in the last quarter because of sluggishness in both computing and gaming sales, NVIDIA appears to have held up relatively better than the other players. The graphics processor market shrunk 3.2% from the fourth quarter of 2012 and 12.9% from the year-ago quarter. AMD’s market share has been sagging in recent quarters partly because of its own miscalculations and partly because of inadequate inventories. But the trend could be reversing, since there were some gains in the last quarter. The company’s game console wins and new product releases could help it regain lost ground.

The company is also diversifying its business into new embedded markets, including communication, industrial and gaming, among others. Further, AMD is targeting the tablet, hybrid and small-screen notebook segments with its Temash product family, built on its low-power Jaguar cores. This could be a potential growth driver for the company.

In Conclusion

We believe that a more conducive market, new game console wins, adoption of new products and good execution are expected to help AMD deal with the PC market weakness.

AMD’s revenues in the first quarter of fiscal 2013 came in at $1.09 billion in the quarter, down 5.8% sequentially and 31.4% year over year. The quarter’s revenues were slightly better than its guidance of a 9% sequential decline (at the mid-point). The sequential decline was due to a 9% decrease in the Computing Solutions segment, partially offset by a 3% increase in Graphics segment’s revenues.

Currently, Advanced Micro has a Zacks Rank #1 (Strong Buy). Another stock that is worth considering is Rambus Inc. (RMBS - Snapshot Report), which has a Zacks Rank #1 (Strong Buy).

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