AMD Looks to Recoup Lost Server Market Share with ARM

AMD (NYSE:AMD) certainly has a keen eye on the server microprocessor market, and why shouldn’t it? After all it once commanded a share of close to 25% compared to paltry 5.5% currently. Intel (NASDAQ:INTC) has been consistently gaining share in this market for the last few years, and going forward ARM-based players such as Nvidia (NASDAQ:NVDA) may likely make an entry.

We wrote recently how AMD decided to acquire SeaMicro to strengthen its server market offering and prepare itself for future competition (see article AMD Picks up SeaMicro to Strengthen Server Market Offering). What is the other thing that the company can potentially do? It could adopt the ARM architecture, especially for servers.

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AMD has stated that there is not much advantage of ARM over x86 architecture when it comes to notebooks and desktops. However, there are certain ways in which the ARM architecture could do better for some server applications.  ((AMD: Little Interest in ARM for Clients, Says Wells, Barron’s, Mar 8 2012)) However, to gain traction in the server market, ARM will need to come up with a 64-bit processor which may take a few years. ^[1]

We believe that ARM might be part of AMD’s broader strategy to gain share in the lucrative server microprocessor market that offers almost 5 times the profits that can be earned from notebook microprocessors. If AMD can regain its lost server market share and have around 25% share by the end of our forecast period, there is potential upside of about 15% to our price estimate.

Our price estimate for AMD stands at $9.16, implying a premium of little under 20% to the market price.

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