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. A change in leadership, a hard drive shortage, a manufacturing glitch and a potential slowdown in the PC market all contributed to a tough 2011 for the company, and, judging by the progress so far, 2012 does not look very promising either.
AMD is set to announce its Q3 2012 earnings Thursday, October 18, and we do not expect it to be any different from the previous quarter results. From the initial estimate of a 1% decline, the company recently changed its forecast of a 10% sequential decrease in revenue. Faced by a slowdown in PC growth rate combined with the adverse macroeconomic environment, we think AMD will continue to struggle for the rest of 2012. However, longer term we believe in the fundamentals of the company and maintain a positive outlook for its future growth prospects. (Read: AMD Should Be A $6 Stock And Here’s Why)
Here are a few key factors to watch for in the Q3 2013 earnings release.
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Demand From Emerging Economies
As the demand from developed countries slows, emerging markets such as China and India are expected to fuel future growth in global PC shipments. AMD’s key processors are used in lower-priced PCs and, with a significant portion of demand expected to come from emerging markets, AMD should benefit from the trend.
However, as revealed by the company in its last earnings release, AMD’s sales were hit by lower channel demand for desktop processors from China and Europe and an overall weaker consumer buying environment. On the contrary, rival Intel claims to have registered a growing demand from these markets.
We expect the PC market to rebound during the second half of 2012 with the upcoming Windows 8 OS launch and the entry of ARM-based players in the market. AMD continues to focus on driving sales in China and other emerging markets. Given that the company derives over 70% of its value from the PC market, how it fairs in emerging economies can significantly impact our valuation for the company.
Growth In Notebook Shipments – Trinity Processors
Last quarter, AMD 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 its Llano APUs launched last year. The company has received a good response for the new product so far, which is evident as it saw its Trinity notebook shipments more than double from the previous quarter.
Additionally, the introduction of Brazos 2.0 led to the sixth consecutive quarter of share gains in the retail price band of $499 and below. 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 its market share next year.
AMD claims that its “ultra thin” laptops, with the new Trinity chips could cost around half the price of an Intel Ultrabook.  However, the fact that Intel might or already has slashed its microprocessor prices by over 10%, could be a concern for AMD. (Read Related Article: Will Lower Ivy Bridge Prices Drive Demand For Ultrabooks?)
Outlook For The Graphics Business
AMD’s graphics division registered a slight decline last quarter. However, considering the seasonal expectations and history, the company feels that the division had a good second quarter as the growth remained flat y-o-y. 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 might have a higher market share in all three divisions of graphic processors – professional, discrete notebooks and discrete desktops – we believe the close competition between the two companies will make any significant share gains by either unsustainable in the long run.
Increasing Share In The Sever Market
Though AMD’s revenue from its server business registered a y-o-y increase, it witnessed a sequential decline last quarter mainly on account of lower unit shipments and a marginal decline in the average selling price (ASP). However, with the closure of the acquisition of SeaMicro during the end of the first quarter and a new line-up of its Bulldozer-based chips in the second quarter this year, we believe that the company is in a good position to regain its lost share in the server processor market.
We will update our price estimate of $5.71 for AMD post the Q3 2012 earnings release.Notes:
- AMD reveals Trinity specs, claims to beat Intel in price, multimedia and gaming, engadget, May 15, 2012 [↩]