AMD (NYSE:AMD) is a semiconductor design innovator and manufacturer of microprocessors used in servers, desktop PCs, and notebooks. The company offers a vivid digital experience with its groundbreaking AMD Accelerated Processing Units (APUs) that power a wide range of computing devices. Its server computing products are focused on driving industry-leading cloud computing and virtualization environments and its superior graphics technologies are found in a variety of solutions ranging from game consoles and PCs to supercomputers. 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).
Amidst tough industry conditions in 2010 led by an uncertain economic environment and hard disk drive shortage, the company also faced some internal difficulties in vacuum and manufacturing issues, which further suppressed supplies. As a result, the company witnessed a tough year with eroding investor confidence. In the past year the stock declined by almost 13%, reaching a low of $4.30 in October 2011. Here we discuss some factors that support our current price estimate of $8.39, as well as potential risks which could lead to a downside in the same.
Increasing Share in the Server Market
Having lost almost half its market share since 2007, we feel that AMD has reached a bottom and hereon will see a y-o-y increase in its server market share, almost doubling from the current level of 5.5% to 12.5% by the end of our forecast period.
Driven by mega data centers and the explosion of client devices such as smartphones and tablets accessing web content, the worldwide server market is expected to grow at an average rate of 7% in the coming years.
We believe that the recent acquisition of SeaMicro along with AMD’s bulldozer based processors will help the company regain lost ground in this segment. AMD seems to be geared up to face growing competition with entry of ARM based players in the market. In the past, it has also shown a willingness to adopt the ARM based architecture if the industry demands so, and we feel it might be part of the company’s long term strategy to regain its server market share.
Market Share Gains in Notebook Processors
With a slowdown in desktops there is likely to be a potential shift to notebooks. Despite threats of cannibalization from tablets, this market is projected to grow. The increasing processing power combined with wireless internet technologies makes them an attractive choice for many consumers. We see the market reaching close to $250 billion by the end of our forecast period.
The success of Llano APU’s and launch of Trinity microprocessor chips, led to a significant increase in AMD’s market share in 2011. Additionally, in the recent quarter earnings, the company stated that its Brazos processors are getting good adoption in netbooks and thin/light notebooks segment.
With an amendment in the Wafer Supply Agreement (WSA) with GlobalFoundries, the company has left behind the temporary manufacturing glitch faced in 2010 and the smoothing in supply of Llano and next generation bulldozer based Interlagos chips, will help cater to the growing demand in this segment where it faces intense competition from Intel’s Ivy Bridge processors.
An increasing amount of notebooks market growth is coming from emerging markets such as China and India, with the former representing about 20% of global PC demand now. As AMD’s key notebook processors are used in low priced notebooks, we feel that the company should benefit from the growth in emerging economies. We are of the view that in the face of potential competition from ARM based players, AMD might not be able to increase its market share much, but keeping in mind the above mentioned factors it should be able to retain its current share of 16% till the end of our forecast period.
Neck to Neck Competition with Nvidia in GPU’s
AMD is the only company offering a top to bottom family of 28-nanometer discreet desktop GPU offering. It also witnessed a solid demand for its next-generation AMD Radeon 7000 graphic cards last year. The company plans to introduce its first 28-nanometer notebook discrete graphics chips in the current quarter and hopes to quickly transition the majority of its product mix to these industry-leading products. The neck to neck competition with Nvidia will keep price in check and the market share gains for either player may not be sustainable over the long-run.
However, when it comes to the professional and gaming console graphics, it does not control even one-fifth of the market and hence we feel there is plenty of opportunity to grow its share in this segment. We forecast a gain of around 3% by the end of our forecast period.
Potential Risks – Stagnant Server Market Share, Threat from ARM Based Players
The potential entry of ARM based players in the server market could intensify competition by making the market more crowded. In the face of such a situation, there is a possibility of AMD not reaching the market size as estimated by us and thus our price estimate could see a downside. If instead of 12.5% market share we forecast, AMD’s market share is 10%, we can discount the current price estimate by just under 10%.
Additionally, the entry of ARM based players in the PC microprocessor market is likely to put pressure on price which we expect to go down sequentially till the end of our forecast period. However, in the likelihood of price falling further than our estimate, the gross margins can decline, in turn affecting our price estimate. You can see the effect of lower notebook processor margins on our overall price estimate by altering the values in the graph below.
Lastly, the company’s late entry into the fastest growing smartphone and tablet market could become a huge drawback for the company. Though it plans to launch its first tablet chip code-named Hondo, this year, it is yet to make an entry into the smartphone division. AMD needs to push its way into this market to hedge against a potential slowdown in the PC market and the risk of losing its market share to competitors.