What Caused The Sudden Surge In AMD’s Stock Price? Why We Believe The Market May Have Over-Reacted

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Advanced Micro Devices

AMD’s (NYSE:AMD) stock price has risen by more than 40% since the company reported its Q1 2016 earnings on April 21st, even though revenue and non-GAAP earnings per share (EPS) were down 19.2% and 33.3% year on year, respectively. (Read Our Earnings Review) Even though AMD is making considerable progress on its strategy to improve its business by gaining share in the graphics and PC markets, growing its semi-custom business and expanding into the data center market, it continues to incur losses. Here’s what caused the stock price to shoot up and why we believe the market may have over-reacted.

1. Licensing deal with Tianjin: AMD will license its x86 processor and SoC technology to a newly formed JV with China based Tianjin Haiguang Advanced Technology Investment Co. In exchange, AMD will receive a licensing fee of $293 million (spread out over multiple payments that are contingent on the joint venture hitting certain milestones) plus royalties on sales of any chips developed by the venture.

Advantages

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– The JV will use the technology to develop chips for server systems to be sold only in China. China is the world’s biggest semiconductor market and the local supply of server chips can help the company accelerate its presence in the market. Additionally, it provides the much needed cash to AMD.

Caveats

– The JV could potentially compete with AMD’s own server chips, limiting its sales in China.

– The limited disclosure around the JV makes it difficult to assess the full potential of the deal, so we have kept our estimates on the conservative side.

We currently forecast AMD’s market share in servers to increase from 1% in 2015 to approximately 5% over the next five to six years, driven by the launch of the of AMD’s next-generation Zen-based CPU as well as ARM SoC.

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2. Three new semi-custom deals to bring in $1.5 billion in revenue: Over the last few quarters, AMD announced three new design wins for its semi-custom business, without providing any other specific details. In its Q1 2016 earnings release the company stated that these three deals are expected to bring in lifetime revenue of $1.5 billion, spread over three to four years, starting in the second-half of calendar 2016. That’s significant, given the company’s dismal financial situation at present. If rumors are to be believed, then one of these deals could be Nintendo’s forthcoming console (Nintendo NX) while the other could be a new more powerful version of the PlayStation 4.

We believe we have adequately factored in the upside in our forecast.

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3. Strong Q2’16 Guidance

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Again, we believe that we have factored in the Q2 guidance adequately in our estimate. We forecast AMD to report revenue of $4.2 billion and diluted EPS of negative 0.17.

Read more about AMD:

>> What’s AMD’s Fundamental Value Based On Expected 2016 Results?

>> How Important Is the PC Market For AMD’s Business?

>> How Much Revenue Can AMD Earn From Its Server Business BY 2020?

>> How Much Revenue Can AMD Add By Increasing Its GPU Market Share?: Trefis Estimate

>> AMD: The Year 2015 In Review

>> What Happens To AMD’s Valuation If Embedded & Semicustom Revenue Declines To $2 Billion In 2016?

>> Where is AMD’s 2016 Revenue Growth Expected To Come From?

>> Intel To License AMD GPU Patents?; Possible Impact on AMD and Nvidia

>> AMD’s Q1’16 Earnings Review: Increasing Computing & Graphics Share & Semi-Custom Sales To Drive Growth

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