AMD (NYSE:AMD), which failed to ride the wave of the growing PC market in 2011 and saw its stock decline considerably, is set to announce its Q1 2012 result on Thursday, April 19. AMD faces competition from PC microprocessor maker Intel (NASDAQ:INTC) as well as mobile chip companies such as Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM). Last year was a tough one for the company as it failed to keep up with the changing consumer trends, which eroded investor confidence. How AMD performs in 2012 depends on some of the factors that we highlight below.

See our complete analysis for AMD

Hard Drive Supply Shortage

The hard drive shortage that resulted from the flooding in Thailand in October 2011 is likely to impact AMD’s result, as 40% of the world’s hard drives are manufactured in Thailand.^[1] According to Gartner, the floods had a limited impact on the December quarter shipments. A major impact will be felt in the first half of 2012 and potentially continue through 2012. Due to the supply shortage, OEMs (original equipment manufacturers) will likely give preference to high-end PCs, which might be disadvantageous to AMD as it sells lower-priced processors compared to Intel.

The company’s GPU segment could also be marginally affected by the hard disk drive shortage.^[2] However, for the longer term, AMD, which has more than 50% share in discrete notebook GPU business, will not only benefit from the growth in global notebook shipments, but also from an increase in discrete GPU penetration in notebooks. We expect the discrete GPU shipments to rebound in the second half of 2012.

Manufacturing Issue

AMD’s revenue growth suffered in the past two quarters because of the manufacturing issues faced by its partner GlobalFoundries. The problem not only limited the supply of Llano, a competitor to Intel’s Sandy Bridge chips, but also affected the company’s shipment of next generation Interlagos, based on the new bulldozer architecture. AMD, which held a 34.2% stake in GlobalFoundries, has since reduced its share and recently announced to give up the final 8.8% equity stake in the company.

The new agreement with GlobalFoundries gives AMD the flexibility to choose its manufacturing partners. Post the manufacturing glitch, it has increasingly turned to other companies such as TSMC. Whether the supply shortage impacts the Q1 2012 result is yet to be seen, but it’s unlikely to impact the subsequent quarters’ results.

Impact of Global PC Trends

After seeing a positive growth in the first three quarters of 2011, mainly backed by growth in emerging economies, the global PC market saw a slight decline in the last quarter. According to Gartner, the PC shipments are expected to continue growing in 2012, but at a moderate rate. According to our estimates, the PC sales (excluding netbooks) will grow at 4.7% for 2012. Although Intel performed much better last year, AMD can leverage the demand in emerging markets to push its lower-priced notebooks and desktops.

Potential Increase in Server Market Share

AMD once held a 15% share in the server processor market compared to 5.5% that it currently holds. In November 2011, the company launched its new bulldozer-based processor which accounted for more than one-third of its Q4 total server unit shipment. We expect to see a regain in momentum in its server business in Q1, with continued adoption of bulldozer-based processors. The acquisition of SeaMicro and the future success of the recently launched single-socket Opteron-Bulldozer processor will further boost AMD’s share in the server processor market. We believe that AMD’s share will go up to 12.5% by the end of the forecast period.

Servers still offer potential for better margins and are growing significantly in the face of a slowing PC market, because of the explosion of data and processing required online.

After a dismal 2011, there are a number of factors that AMD needs to be wary of in 2012, such as the entry of ARM based players in PC microprocessor market which threaten to intensify competition, the potential cannibalization of PC sales by tablets, Intel’s ultrabook, and the launch of Windows 8.

Yet, we remain positive on the stock’s long-term performance on account of various promising factors: the recent management revamp, workforce and operational cost trimming, products such as the bulldozer which position it well in the power consumption market, and the launch of Trinity microprocessor chips.

We will review our current price estimate of $9.21 for AMD post the Q1 result.

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