The year 2011 was a tough period for AMD (NYSE:AMD) as the company failed to ride the wave of growth in PC market. AMD’s failure to keep up with changing consumer trends further eroded investor confidence. With the change in leadership and a number of positive catalysts in store this year, AMD was hopeful for a turnaround in 2012. However, going by the progress so far, we expect its growth rate to drop further this year.
While most of its competitors such as Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN) posted healthy earnings last quarter despite macroeconomic headwinds, AMD was the hardest hit with an 11% sequential decline in revenues. AMD’s stock has registered around 37% decline in its value since the start of the year, though the price peaked at $8.4 in March before tumbling to the current level of around $3-$4.
We think AMD will continue to face the adverse impact of current macro-economic headwinds for the rest of 2012. However, keeping in mind the strength of its core businesses and future opportunities, we estimate the company to regain its growth momentum 2013 onward.
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Our price estimate of $5.71 for AMD values the company at a premium of over 60% to the current market price. Here, we discuss certain factors that drive our valuation for AMD.
Trinity and Brazos 2.0 To Drive Growth in Notebook Shipments
After a decline in 2008, AMD has continuously increased its notebook processor market share so far. AMD’s competitive prices in tandem with the success of its Llano APUs led to a 2.7% increase in its market share.
AMD recently came out with its next generation Trinity APUs, which boasts up to 12 hours of battery life and almost double the performance per watt compared to the Llano APUs. Additionally, with the introduction of Brazos 2.0, the company marked its sixth consecutive quarter of share gain in the retail price band of $499 and below in Q2 2012. As AMD would have most of its Trinity and Brazos 2.0 transitions complete by the end of this year, we expect it to register a slight increase in market share.
Additionally, an increasing share of notebook sales is coming from emerging markets such as China and India, and AMD’s key notebook processors are used in low-priced notebooks. Thus, we expect AMD to benefit from this trend in the future.
Potential Threat: Apart from intense competition from Intel-powered ultrabooks, AMD also faces a potential threat from the entry of ARM-based players in the PC microprocessor market later this year. With the market getting more crowded, the existing players are bound to face pricing pressure which could erode margins in the long run. Additionally, AMD could also lose some of its market share to the new entrants.
AMD recently collaborated with ARM Holdings (NASDAQ:ARM.L) to use the latter’s license to develop a platform security processor, which leaves its arch rival Intel as the only x86 player for PC and mobile devices processors. (Read: AMD Strengthens Server Portfolio With New Opteron Chips) However, if AMD witnesses a decline in market share for the rest of our review period, there could be a marginal downside to our price estimate.
Positive Outlook For The Graphics Business
Currently, Nvidia and AMD are the only two dominant players in the GPU market, with Nvidia accounting for a higher percentage of the market. While Nvidia has a substantial lead over AMD (in terms of market share) in the professional graphics market, competition between the two is more intense in the discrete desktop and notebook GPU market.
AMD released a full-line of mobile discrete graphics to market last quarter, apart from recapturing the graphic performance leadership position with the launch of the world’s fastest GPU. (Read: AMD Takes On Nvidia With The World’s Fastest GPU) While Nvidia (NASDAQ:NVDA) might have the upper hand in the GPU market right now, we believe stiff competition between the two will make any significant market share gain by either unsustainable in the long run.
Potential Increase in AMD’s Server Market Share
Historically, AMD held a 15% share in the server processor market, but has witnessed a continuous decline mainly on account of its execution issues. Intel’s launch of its Xeon processors puts additional pressure on AMD as the former gained most of its market share that AMD lost over the years.
However, since the launch of its Bulldozer architecture, AMD has seen a steady increase in demand for its high-end server processors. The company now powers 24 of the world’s top 100 supercomputers and is showcasing speed and throughput of its Opteron chips in the world’s third fastest supercomputer, Jaguar. AMD plans to expand its focus on mainstream IT buyers and is targeting growth in mega data centers.
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. Post the acquisition of SeaMicro, we believe the company is better positioned with strong IP and an enhanced product offering to leverage growth in the server market.
Potential Risk: We estimate the server processors segment to contribute close to 14% to AMD’s valuation. If AMD’s share in the server market does not rebound as we anticipate and instead remains constant for the rest of the review period, there would be close to 15% downside to our price estimate.
AMD plans to reveal its new low-power Jaguar core aimed at tablets and netbooks at the Hot Chips show next month. The company’s commitment to change its strategy to stay in-line with shifting consumer trends should augur well for its valuation. (Read: AMD To Reveal Its Low-Power Tablet Processors Next Month)