AMD (NYSE:AMD) competes primarily with Intel (NASDAQ:INTC) in the microprocessor market that spans notebooks, desktops and servers. We estimate the price for AMD’s stock at $7.74, which is about 1% below the current market price. However, significant upside or downside exists depending upon how AMD’s processor profit margins trend.
We explore this in the below analysis.
Margins Have Experienced Sharp Declines in the Past
AMD has struggled with margins in the recent past in its microprocessor business. The profit margins (EBITDA) dipped from 46% in 2005 to 4.4% in 2007 before picking up back to little over 10% in 2009. This was primarily a result of significant competition resulting in declining prices while manufacturing costs stayed on the higher side.
AMD encountered challenges in 2006 and had problems in maintaining its supply chain with the significant ramp-up in microprocessor units sold to its diverse group of customers, leading to delays in product shipments. Additionally, in 2007, the net revenue of server, desktop, and notebook processors declined significantly compared to 2006 caused by steep price declines. These events resulted in margins shrinking to record low by the end of 2007.
Drag the trend-lines in the charts below to see the impact of your projections on AMD’s price estimate.
Processor margins are very critical to our stock price estimates given their volatility in the past. Below we discuss upside and downside potential to our price estimate for AMD based on profit margin expectations.
Change in Margin Expectations Creates Significant Upside and Downside
We currently estimate that processor profit margins will rise from 10% in 2009 to a little over 25% by the end of our forecast period as pricing competition moderates and AMD gains from productivity improvements stemming from the transition to 45 nm process technology.
However if these margins were to further increase to 30% during the same time frame, there can be a mammoth 46% upside to AMD’s price estimate. On the other hand, if they were to improve to only 20%, there can be a downside of as much as 48% to our $7.74 price estimate for AMD’s stock