VALUATION HIGHLIGHTS

1. Computing and Graphics constitute 60% of the Trefis price estimate for AMD's stock.
2. Enterprise, Embedded and Semi-Custom constitutes 38% of the Trefis price estimate for AMD's stock.

WHAT HAS CHANGED?

Full-year 2020 Earnings

AMD has benefited from the Covid pandemic, due to increased sales of gaming consoles and rising data center demand. This is evident from its full-year 2020 earnings, where net sales came in at $9.76 billion, almost a 1.5x jump from 2019, where revenues stood at $6.73 billion. Net income, too, jumped significantly, from $341 million to $2.49 billion, a rise of around 8x, driving EPS from $0.31 to $2.10. This was largely due to AMD being able to control operating expenses, driving operating margins from 9.4% to 14%.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of AMD's value that present opportunities for upside or downside to the current Trefis price estimate for AMD:

• AMD's Computing & Graphics Revenue: The game console business has a cycle of three to four years. AMD already has strong contracts with gaming console providers and recently signed a new contract with Atari, which launched its VCS console in 2019, and the console is powered by AMD's Radeon GPU. The segment is seeing strong growth in its Ryzen processors. We estimate revenue from the division to reach over $20 billion over our review period. However, there is a possibility that we are under-estimating the gains from the Ryzen's processors, given its 7nm chips, which rolled out in 2019. If AMD's Computing & Graphics revenue increase to $30 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 Revenues: We estimate the Enterprise, Embedded & Semi-Custom revenue to increase from $2.3 billion in 2017 to $15.6 billion by the end of our review period. However, there is a possibility that we are under-estimating the gains from this segment, given AMD's expansion and deals with new clients, such as Cisco, and HP Enterprise. If AMD's Enterprise, Embedded & Semi-Custom revenue increase to $20 billion by the end of our review period, there will be a more than 15% upside in our valuation for the company.

For additional details, select a driver above or select a division from the interactive Trefis split for AMD at the top of the page.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

We believe that 'Enterprise, Embedded and Semi-Custom', and Computing & Graphics divisions are the two key 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.

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 Nintendo Switch, Sony’s PlayStation, and Microsoft’s Xbox One.

AMD has 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.

KEY TRENDS

The New 7nm Chips

AMD is currently developing 7nm chips with TSMC, and plans to start shipping the new chips in 2019. Intel is also working on 10nm chips, which got delayed till 2019. As such, AMD's 7nm chips will be a generation ahead of Intel's current offerings. AMD plans to launch 7nm chips for its GPU, CPU, as well as EPYC line up, which can help gain market share from Intel, especially in single socket servers for data center and enterprise market.

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 its 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.

As of August 2018, AMD has over 50 customer platforms, including Cisco and HP Enterprise, which now have EPYC servers.

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. The newer chips pack GPU within the CPU leading to much better graphics performance than one can get from traditional integrated graphics.

Mobile Processing

This remains key area that is not yet reasonably explored by both Intel and AMD.

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. In fact, it is estimated that IoT market will grow at a CAGR of 27% to $561 billion in 2022.

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.