AMD (NYSE:AMD) manufactures and markets microprocessors used in servers, desktop PCs and notebooks, a market that has been dominated by Intel (NASDAQ:INTC) for the last 20 years. Additionally, it also manufactures Graphics Processor Units (GPUs) used in PCs to process information for graphics displays, an area dominated by Nvidia (NASDAQ:NVDA).
A lack of leadership, combined with the manufacturing glitch faced by its partner in 2011, kept the company from keeping pace with changing consumer trends, which in turn resulted in battered investor confidence. Here, we analyze our rationale behind certain key drivers and discuss how a deviation from them will impact our current valuation of $8.39 for the company.
The main drivers to our valuation are:
1. AMD’s notebook processor market share: AMD’s market share was 16% in 2011, up from 13.3% in 2010
2. AMD’s server processor market share: AMD’s market share stood at 5.5% in 2011, a decline of 1.5% from 2010.
3. AMD’s market share in Graphics: The GPU segment contributes around 25% to our price estimate:
- Discrete notebook GPUs market share: AMD held a 48% market share in discrete notebooks in 2011.
- Discrete desktop GPU’s market share: AMD’s market share in 2011 stood at 39%.
- Professional and Gaming Console Graphics GPU: The market share for AMD stood at 16% in 2011.
15% Upside Scenario | $9.75 Price Estimate
1. Trinity Chips to Increase AMD’s Market Share in Notebook Processors (+6%):
From 17% in 2007, AMD’s notebook processor market share registered a significant drop in 2008. However, over the years the company regained some of the lost market share and as of 2011 accounted for 16% of the market. This could be attributed to its competitive price in tandem with success of its Llano APUs. With the recent launch of it next generation low power trinity chips, we expect AMD to see a slight increase in its market share in 2012 and estimate it to remain around the same level throughout our forecast period. (See Our Article: AMD’s Trinity Chips To Challenge Intel Powered Ultrabooks)
However, certain factors such as the growth in demand in emerging markets, could work in the company’s favor in the long run. Besides fueling the global PC growth rate, an increasing share of notebooks is coming from emerging markets. China and India are big markets, with the former representing close to 20% of the global PC demand.
As AMD’s key notebook processors are used in low priced notebooks, it might benefit from this trend and gain a higher than expected market share. If AMD’s market share reaches 20% by the end of our forecast period, we can see a 6% upside to our price estimate.
2. Enhanced Portfolio To Increase AMD’s Share In The Server Market (+6%):
AMD’s share in the server processor market declined from 15% in 2007 to just 5.5% in 2011, primarily on account of its execution issues and Intel’s onslaught with its Xeon processors. AMD’s loss was further compounded with a delay in its Barcelona chip in 2008.
However, with an enhanced portfolio post the acquisition of SeaMicro, the company looks determined to regain its lost share in the server market. We believe AMD to have reached a trough in 2011; and keeping in mind the success of its Bulldozer based chips along the recent launch of a new line-up of Opteron processors based on the same, expect its share to register an y-o-y growth through the end of our forecast period. (See Related Article: AMD Strengthens Server Portfolio With New Opteron Chips)
With its new chips based on the Interlagos design priced between $125-$1109, AMD could play its value-for-money card by claiming higher performance compared to equivalently priced Intel’s server processors. In the likely scenario of AMD’s market share going up to as high as 18%, we will see a 7% upside in our price estimate.
3. Increase in AMD’s Overall GPU Market Share (+3%):
Within graphic processors, the discrete notebook segment provides the maximum value to our price estimate, followed by discrete desktop GPU’s and professional graphics segments. Nvidia remains the major competitor of the company in all the three segments. Keeping in mind the neck-to-neck competition between the two companies, we feel that a significant share gain by either would not be sustainable in the long run. Hence, we estimate AMD’s share in discrete notebook and desktop GPU’s to remain more or less around the same level till the end of our forecast period.
However, as the company does not even account for one-fifth of the market in the professional and gaming console graphics division, we feel there is ample opportunity for growth. We expect AMD to register a slight share gain and account for 19% of the market by the end of our review period.
Assuming a likely scenario, where owing to price competitiveness, AMD is able to significantly increase its market share in all the three segments – Notebooks (55%), Desktops (45%) and Professional Graphics (25%), there will only be a marginal upside of 3% to our price estimate.
17% Downside Scenario | $6.97 Price Estimate
1. Competition from ARM Based Players to Reduce AMD’s Notebook Processor Market Share (-8%):
The PC market, that has traditionally been dominated by x86 processor architecture, is likely to open up with the slated entry of ARM based players in 2012. Windows 8 will be ARM-compatible, which is likely to threaten the current share that companies such as Intel and AMD enjoy in the PC market. AMD recently collaborated with ARM Holdings (LSE:ARM.L) to strengthen its security solutions, which might cushion the impact marginally. (See Our Article: AMD Strengthens Its Security Solutions With ARM Partnership)
However, the entry of new players is likely to crowd the market leading to an increase in competition. If AMD’s share comes down to 11% by the end of our forecast period, there would be an 8% downside to our price estimate.
2. Less Than Expected Gain In The Server Market (-5%):
Though, we strongly believe that there will be a revival in AMD’s market share going forward, there could be a scenario of our estimate being too optimistic. With the possible entry of ARM based players in the server market as well, AMD will have an additional task to fend off competition from new players in the market. If the company’s market shares increases only up to 8% by the end of Trefis forecast period, we can see a 5% downside to our price estimate.
3. Nvidia’s Dominance in GPUs threaten AMD’s Market Share (-3%):
Nvidia has won several design deals for Intel’s Ivy Bridge platform scheduled for 2013; and it scored yet another point in its ongoing competition with AMD with its chips present in the next generation MacBook Pro. (Read Our Article: Nvidia Notches New MacBook Pro Win Over AMD)
Thus, there could be a possible scenario where AMD might not be able to retain its current market share in the GPU segment. If there is a slight decline in AMD’s market share – Notebooks (45%), Desktops (35%) and Professional Graphics (15%), then we can account for a 3% decline in our price estimate.