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Investment Overview for AMD (NYSE:AMD)
Below are key drivers of AMD's value that present opportunities for upside or downside to the current Trefis price estimate for AMD:
Enterprise, Embedded & Semi-Custom
AMD's Enterprise, Embedded & Semi-Custom Revenue: The game console business has a cycle of three to four years. In late 2013, Microsoft and Sony launched their new products, which can provide strong revenue growth for AMD till 2017. Additionally, last year, AMD secured two new wins with game console companies in the segment, which are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Furthermore, it is rumored that AMD has scored a design win with Apple for the next version of its MacBook, which can further expand its base for the semi-custom business. We estimate revenue from the division to cross $4.3 billion over our review period. However, there is a possibility that we are under-estimating the gains from these new designs wins. If AMD's semi-custom and embedded revenue increase to $6 billion by the end of our review period, there will be a more than 20% upside in our valuation for the company.
AMD Enterprise, Embedded & Semi-Custom EBITDA Margin: We estimate the Enterprise, Embedded & Semi-Custom EBITDA margin to increase from 15% in 2016 to a little over 20% by the end of our review period. If EBITDA Margin for the division increases to only 17%, there will be a 10% downside to our current price estimate for AMD. On the other hand, if margins increase to 21% over the same period, there will be a 10% upside in our price estimate.
AMD Server Processor Market Share: We expect AMD's server processor market share to increase from an estimated 1% in 2015 to approximately 5.5% by the end of our review period. However, there could a 20% upside to our price estimate if AMD's server market share increases to 10%. On the other hand, there will be a 25% downside if AMD's server market share stays around the current level for the rest of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for AMD at the top of the page.
AMD manufactures and markets microprocessors used in servers, desktop PCs, and notebook PCs. Microprocessors are a PC's Central Processing Unit (CPU) or the "brain" behind the computer. A microprocessor is the single most important component that drives computer power and performance. Additionally, AMD manufactures Graphics Processor Units (GPUs), which are used in PCs to process information for graphics displays. AMD sells its processors primarily to PC manufacturers such as Dell, HP, Sony, and Toshiba.
AMD also manufacturers embedded processors used in products that require high-to-moderate levels of performance, where key features include low cost, mobility, low power, and small form factor. The company also makes System-on-Chip (SoC) products and technology for game consoles.
We believe that 'Enterprise, Embedded and Semi-Custom', 'Graphics' and 'Server Processors' divisions are the two most valuable segments within AMD for the following reasons:
New Growth Markets
In order to reduce its exposure to the declining traditional PC market, AMD intends to derive an increasing proportion of its revenue from high growth markets, including semi-custom, ultra-low power client, professional graphics, dense server and embedded solutions in the next few years.
AMD devised a unified gaming strategy in 2014 that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. It believes that gaming is one of the key pillars of its semi-custom chip business.
AMD 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 Xbox One.
A few quarters back, AMD introduced 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.
Collaboration With ARM To Help Tap Growth In Servers
In October 2012, AMD announced its collaboration with ARM Holdings to design server processors using the ARM technology in addition to its x86 processors for multiple markets, starting with cloud and data center servers. The collaboration with ARM makes AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems. AMD believes that ARM CPUs have the potential to account for 20% of the server market by 2016 or 2017.
Expansion Into The Server Market
AMD clinched a deal with Google to supply its FirePro S9300 x2 GPU in the latter’s cloud platform. In addition, the company also bagged a deal with Chinese company Alibaba to supply Radeon Pro chips for the latter’s servers. These deals are quite significant for AMD, as most of the big players in the cloud storage market currently use Nvidia’s GPUs.
In 2016, AMD took another major step to expand its presence in the server market. The company licensed its x86 processor and SoC technology to a newly formed JV with China based Tianjin Haiguang Advanced Technology Investment Co. The JV will use the technology to develop chips for server systems to be sold only in China. There is a great incentive to develop chips for server systems specific to China, as it is the world’s biggest semiconductor market and the local supply of server chips can help the company accelerate its presence in the market. It is worth noting that AMD has an edge over its competitors in the server market, as it is the only processor provider to bridge the x86 and 64-bit ARM ecosystems. In 2012, the company announced its collaboration with ARM Holdings to design server processors using the ARM technology in addition to its x86 processors for multiple markets
On-going server virtualization
Server virtualization is essentially server consolidation that enables the running of multiple applications on a single server instead of on multiple servers. Server virtualization is driving a mix shift to higher-end servers, which requires multi-core processor servers that tend to be more complex and more expensive than traditional single core processors.
Convergence of Graphics & Processing
AMD and Intel have moved away from the idea of integrated graphics. Intel's introduction of Sandy Bridge processors and AMD's launch of Llano essentially indicate that the future of integrated graphics is over. These chips pack GPU within the CPU leading to much better graphics performance than one can get from traditional integrated graphics.
This remains key area that is not yet reasonably explored by both Intel and AMD.
PC market opening up to ARM
We will see ARM-based processor manufacturers entering PC market which has traditionally been dominated by x86 processor architecture.
Growth in The Internet-of-Things (IoT) Market
IoT includes all other computing devices apart from PCs, tablets and smartphones. IoT is still at a nascent stage, but it is expanding fast and is considered to be the next big growth driver in the semiconductor industry, after smartphones and tablets.
According to Cisco Consulting Services, IoT has the potential to unleash $19 trillion of global economic value, by 2024. McKinsey Global Institute estimates that the impact of IoT on the global economy can be as high as $6.2 trillion by 2025. The installed base for IoT devices is estimated to grow from around 10 billion connected devices today to as many as 30 billion devices (50 billion as per some estimates) by 2020.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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