AMD: Q4’14 To Be Weak But 2015 Looks Promising

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AMD: Advanced Micro Devices logo
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Advanced Micro Devices

Owing to a decline in PC shipments, market share loss to Intel (NASDAQ:INTC), and a late entry in new emerging markets, AMD (NYSE:AMD) has seen it revenue base shrink in the last two years. The company completed its restructuring phase in 2013, which helped generate strong revenue by successfully ramping up a diverse set of new products. It focused on accelerating and executing its restructuring initiatives in 2014, which helped generate strong revenue by successfully ramping up a diverse set of new products. For the first nine months of 2014, AMD witnessed a 15% increase in its revenue base and managed to lower its net losses to $39 million, compared to $172 million in the first nine months of 2013. The company will report its Q4 2014 earnings on January 20th.

Despite the strong performance, AMD’s stock price has declined by approximately 40% in the last six months, as it reported weak Q3 2014 earnings and its Q4 2014 outlook was below analysts’ expectations. AMD expects its revenue to decline 13% sequentially in Q4 2014. The unexpected change in leadership (AMD appointed Dr. Lisa Su as president and CEO just a week prior to the Q3 2014 earnings release) led many analysts to believe that the company’s turnaround may be taking longer than anticipated. The stock was consequently downgraded by many brokerages. Earlier this month, AMD announced that three senior executives (the head of its personal-computer chip business, chief strategy officer and head of marketing) are leaving the company to pursue new opportunities. An AMD spokesperson commented that the change to the leadership team reporting to the company CEO are a part of implementing an optimal organization design and leadership team to drive AMD’s future growth. [1]

Our price estimate of $4.12 for AMD is at a more than 50% premium to the current market price. We will update our valuation after the Q4 2014 earnings release.

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AMD Lost PC Share To Intel In 2014; Focus On The Commercial Segment Can Help AMD Improve Its Market Position

AMD continues to struggle in the Computing and Graphics business due to ongoing weakness in the consumer PC market. The company lost some market share to Intel (Bay Trail) in 2014. Intel accounted for 94.7% of the revenue in the PC processor market while AMD accounted for just 5.2% in Q2 2014, according to research firm IDC. Intel’s chips powered 84% of desktop units shipped and 88% of laptops in the quarter. AMD lost market share to Intel in Q3 2014, since the latter reported strong growth in PCs despite a relatively flat PC market. In comparison, AMD witnessed a 15.6% year-on-year decline in its computing and graphics revenue.

The rate of decline in global PC shipments decreased in 2014 as Windows XP migration (to machines running newer operating systems) and commercial spending helped offset the weak consumer PC demand. Both AMD and Intel have indicated that the PC market is stabilizing. AMD suggests that is it over indexed in the consumer and channel space, especially in emerging geographies such as China, and thus its revenue base in the Computing and Graphics business has come down in the last few quarters. Nevertheless, the company managed to reduce its operating loss from the segment to $20 million in the first nine months of 2014, compared to $86 million during the same period in 2013.

AMD believes that its increasing focus on the commercial PC segment will help it improve its performance in this segment. AMD launched its Pro A-Series APU in Q2 2014 and claims to have met its goal to double the number of AMD-based commercial client design wins from last year, in Q3 2014. New commercial client offerings from Dell, HP, Lenovo have started ramping, resulting in approximately a 50% sequential increase in AMD’s commercial APU shipments in the quarter. AMD believes it will continue to see growth in the commercial PC segment in 2015. Within the consumer space, AMD expects its Beema and Kaveri products to help increase shipments in the future. Overall, the company is focusing on getting the Computing and Graphics business back to break even and into profitability at the start of 2015.

Semi-Custom Business Will Be An Important Source Of Revenue For Years To Come

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. AMD powers all major next generation consoles including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s Xbox One. The company shipped a record number of units for its game console customers in Q3 2014, as Microsoft (NASDAQ:MSFT) and Sony prepared for the holiday season. As of January 5, cumulative PlayStation 4 were above 18.5 million. Research firm IHS estimates that AMD earns around $100 per PlayStation 4 shipment.

The game console business has a cycle of three to four years. Microsoft and Sony launched new products in late 2013 and thus AMD expects another few years of strong game-console revenue growth from them. Microsoft recently announced that it is shipping game consoles in China. In its Q3 2014 earnings call, AMD announced securing two new wins in the segment, which are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Design work for these opportunities has started and AMD anticipates first silicon revenue from these deals in 2016. One of the wins is the first 64-bit ARM-based semi-custom design, building on the company’s growing ARM 64 momentum in the embedded and server markets. The other is an x86 device.

AMD is diversifying its semi-custom business beyond gaming, and claims that the semi-custom design win pipeline remains strong. It expects this division to be an important source of revenue for the company in the future as well.

The ARM Based Server Processors To Start Shipping In Early 2015

After successfully sampling devices for major ecosystem partners such as firmware, OS, and tools providers, AMD announced the immediate availability of its Opteron 64-bit ARM based processor, code-named Seattle, in Q3 2014. The product is on track to start shipping in early 2015. AMD is the only provider to offer the standard ARM Cortex-A57 technology. AMD claims that the ARM-based server processors will be faster and more powerful than its existing low-power x86 server processors. The collaboration with ARM makes AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems. For 2016, AMD is designing a new product code-named K12, which will be built with an AMD processor using an ARM based core.

The server market has a current TAM of around $8.5 billion, and AMD believes that ARM could take up to 20% of that by 2020. [2] AMD is confident that offering both x86 and ARM-based servers will help the company increase its footprint in the fast growing dense server space in the future.

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Notes:
  1. Three Senior Executives to Leave Advanced Micro Devices, The Wall Street Journal, January 12, 2015 []
  2. Advanced Micro Devices’ (AMD) Management Presents at Barclay’s Global Technology Conference (Transcript), Seeking Alpha, December 9, 2014 []