Here’s Why AMD’s Stock’s Rally Might Not Last

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AMD: Advanced Micro Devices logo
AMD
Advanced Micro Devices

Quick Take

  • AMD witnessed a 34% increase in its stock price last week. We think that its increasing momentum in game consoles is the key factor responsible for the upsurge.
  • It recently launched its semi-custom chip business unit that focuses on high-volume, high-value applications that span a wide range of markets, including, gaming, set-top boxes, smart TVs, tablets, servers, etc.
  • It has already won its first customer design with Sony Playstation 4 and is rumored to be present in Microsoft’s next generation Xbox game console.
  • Its strategy to diversify itself beyond the PC market is a good long-term strategy; however, deriving >85% of its revenue from PCs, it remains highly vulnerable to any adverse development in the market.
  • Global PC shipments are expected to decline for the second consecutive year in 2013.
  • AMD’s growing focus on the mobile computing market will have a minimal impact on the stock price as it has a long way to go before it can effectively compete with Intel and established ARM players in the tablet market.

AMD (NYSE:AMD), which manufactures and markets microprocessors used in PCs and servers, marked its biggest weekly gain in almost a decade with a 34% increase in its stock price last week. While a combination of factors such as short covering, take-over rumors, new FX series additions and the processor price cut could have contributed to the positive sentiment, we think that AMD’s increasing momentum in game consoles is the key factor responsible for the jump in its stock.

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In addition to declining PC shipments, internal factors such as a change in leadership, a temporary manufacturing glitch and a slow response to rapidly changing consumer needs led to an over 60% decline in AMD’s stock last year. In an effort to strengthen its competitiveness in the market, AMD announced a restructuring plan in Q3 2012. Apart from lowering its expense base, the company intends to focus on alternate markets, new platforms and partnerships to turnaround its business.

We believe that AMD’s strategy to diversify beyond the PC market is a good long-term strategy. However, it continues to derive over 85% of its revenue from the PC market, which makes it highly vulnerable to any adverse development in the industry.

We believe that the restructuring effort will re-accelerate AMD’s top-line growth this year onward. However, until the company shows a continuous design win momentum in PCs and sustained gains in alternate markets, we maintain a conservative estimate for its growth rate.

See our complete analysis for AMD

Growing Momentum In The Game Console Space

In an effort to reduce its dependence on PCs, AMD recently launched a semi-custom chip business unit. A semi-custom chip combines AMD’s central processing and graphic capabilities and can be integrated with the customers’ intellectual property. The new unit focuses on high-volume, high-value applications that span a wide range of markets, including, gaming, set-top boxes, smart TVs, tablets, servers, high performance computing, infrastructure applications, etc.

AMD has already won its first customer design with Sony confirming that it is using AMD’s CPU for the PlayStation 4, expected to launch this fall. If buzz on the web is to be believed, Microsoft (NASDAQ:MSFT) will also use AMD’s semi-custom chip to power its next generation Xbox game console. AMD also earns royalty revenue from use of its graphics in the current Xbox 360 and Nintendo Wii.

As part of its restructuring effort initiated in Q3 2012, AMD is focusing on increasing its share in additional embedded markets including gaming, communication and industrial among others. It intends to leverage the success of its APUs and graphics to tap the growing potential in such markets. AMD aims to increase the revenue contribution from its embedded business to almost 20% by 2014, from the current level of a mere 5%.

With an aim to leverage growth in the $67 billion local video game market, it looks like AMD is committed to building its relationship with the makers of video game consoles. ((Microsoft Said to Adopt AMD Chips for Next Xbox Console, Bloomberg, April 8, 2013))

PC Sales Remained Sluggish In Q1 2013; Declining Shipments In 2013

The slowing enterprise market, consumer softness in mature markets (the U.S. and Western Europe), slowing demand from emerging markets, a weak reception for Windows 8 OS and cannibalization by tablets and smartphones are the main factors leading to the slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well. Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013 in almost two decades. Though IDC estimates a revival in demand in the second half of the year, we keep a conservative estimate for PC shipments in the future.

(In Millions)

2009

2010

2011

2012

2013

2014

2015

2016

Total PC Sales

304.9

347.1

363.9

350.4

344.4

341.5

339.9

339.5

Desktop Sales

136.2

145.9

154.8

148.4

145.4

142.5

139.0

135.5

Notebook & Netbook Sales

168.7

201.2

209.1

202.0

199.0

199.0

201.0

204.0

Source: IDC Press Release & Trefis Estimate

AMD has a robust pipeline of upcoming platforms which could fuel demand for its products in 2013 and beyond. At the 2013 Consumer Electronics Show in January, it introduced the Kabini platform meant for ultrathin notebooks in the low power segment. Kabini will be AMD’s first quad-core APU and will replace its Brazos 2.0 platform. Earlier this year AMD also introduced a new APU, code named Richland, which targets the desktop and performance ultrathin segments. AMD claims that the Richland platform delivers over 20%-40% better visual performance compared to its predecessor, Trinity.

We feel that the introduction of higher efficiency processors could lead to additional design wins for AMD, which will help the company maintain its market share in the coming years. However, with the global PC market still in the doldrums, we do not believe the same will provide much upside to the stock.

Insignificant Presence In The Mobile Market

Earlier this year, AMD introduced its Temash platform that targets the fast growing performance tablets and hybrid markets. Failing to score significant design wins, AMD’s earlier efforts to enter the tablet market have been unsuccessful. AMD claims that the new processor offers 100% higher graphics processing performance compared to its predecessor, the Hondo chip.

Temash will be industry’s first quad-core x86 SoCs, though it will be available in both dual and quad-core variants. It offers a longer battery life and is specifically targeted at high performance tablets that can run full HD games and productivity applications. APUs based on the Temash platform also support the Turbo Dock technology.

The Turbo Dock technology automatically adjusts AMD’s APU performance when a hybrid PC/convertible is docked, and the device is used for complex tasks such as content creation. On the other hand, the Turbo Dock lowers power consumption when in tablet mode. Temash-based tablets and hybrid notebooks will be available in the market later this year.

We believe that AMD’s growing focus on the mobile computing market has a minimal impact on turning around the stock price as it has a long way to go before it can effectively compete with Intel and established ARM players in the tablet market.

Our price estimate of $2.91 for AMD is at a close to 20% discount to the current market price.

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