Microprocessors and graphic processors manufacturer AMD (NASDAQ:AMD) will report its Q1 2014 earnings on April 17. Having incurred losses for several quarters, the company returned to profitability and positive cash flow in Q3 2013. Renewed demand in its traditional PC segment and growth opportunities in new markets have helped AMD improve its financial and operational performance in the last few quarters. AMD announced a three-part restructuring plan in Q3 2012 in an effort to strengthen its competitiveness in the market and better manage its expenses and cash. In 2013, AMD completed the restructuring phase which helped generate strong revenue by successfully ramping up a diverse set of new products.
AMD aims to further diversify its portfolio and derive 40%-50% share of its revenue over the next two to three years from high growth markets, including semi-custom and ultra-low power processors, professional graphics processors, as well as processors for dense server and embedded solutions. Expanding its footprint in alternate growth markets insulates AMD, to some extent, from declining PC shipments and the strong market positions of its chief competitors, Intel and Nvidia.
Our price estimate of $3.72 for AMD is at a slight discount to the current market price. We will update our valuation after the Q1 2014 earnings release.
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The Expanding Gaming Business To Drive Growth
AMD devised a unified gaming strategy in March 2013 that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. It believes that it is effectively positioned to drive the next revolution in gaming, and now powers all major next generation consoles including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s (NASDAQ:MSFT) Xbox One. Sony and Microsoft together sold more than 7 million units in less than two months, more than double the number of prior generation consoles sold in their first quarter of introduction. 
The company believes that gaming is one of the key pillars of its semi-custom chip business. It shipped millions of units to support the next-generation Sony and Microsoft game consoles in Q3 2013 and Q4 2013, which utilize AMD’s system-on-chip Jaguar core and Radeon HD graphics chips.
Last month, AMD announced three new game developer partnerships — Rebellion Developments, Square Enix and Xaviant — for AMD Gaming Evolved, a relationship program that assists developers in creating an enhanced PC gaming experience. Collaborating with these key developers, AMD aims to play an important role in enabling quality PC gaming experience by optimizing the image quality and performance of highly-anticipated titles for an intense gaming experience.
The company also entered into a technology partnership with Crytek, which adds AMD’s Mantle graphics API support to CRYENGINE. This is the latest iteration of the industry-leading game engine that has powered Crytek gaming titles for almost a decade. AMD’s Mantle API, launched in September 2013, helps improve overall game performance. AMD believes that the combination of Mantle and CRYENGINE empowers game developers to accelerate PC development and extract unprecedented gaming performance.
It expects the positive momentum to continue with the rise in game console SOC shipments and new wins from its semi-custom design pipeline.
Increasing Market Share In Professional Graphics
AMD currently accounts for 21% of the professional GPU market, which is dominated by Nvidia. Strong performance in professional graphics was an important factor that drove AMD’s growth in the last six months. In Q4 2013, it marked its sixth consecutive quarter of revenue and share growth in the professional graphics business segment, which accounts for approximately 7% of its valuation (as per our estimate).
AMD believes that it can drive additional growth in the professional graphics segment based on the incremental focus and investments it is making to strengthen its product portfolio, expand its work with key software developers and secure more design wins.
A Broad Embedded Products Portfolio To Target Different Segments
In September 2013, AMD announced its future road-map for the fast growing embedded computing market. In addition to the new improved x86 processors, the company unveiled its first ARM-technology based processor, extending its ambidextrous strategy to embedded markets. It is now the first company to offer its customers both ARM and x86 architecture based solutions for low-power and high-performance embedded compute designs.
As per a recent VDC Research report, the market for traditional and intelligent embedded CPU systems will grow 36% in the next few years, from 330 million units in 2013 to over 450 million units by 2016. The x86 and ARM architecture together are estimated to account for 82% of the total addressable market. 
AMD has a broad range of embedded processors for different segments in its portfolio, offering a number of price, performance and power options to meet the needs of embedded designers. Its strong embedded design pipeline will drive growth for this business across 2014.Notes:
- Advanced Micro Devices Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 21, 2014 [↩]
- AMD Details Embedded Product Roadmap, AMD Press Release, September 9, 2013 [↩]