AMD (NYSE:AMD) struggled last year under the shadow of its rival Intel (NASDAQ:INTC) in the PC microprocessor market and against Nvidia (NASDAQ:NVDA) in the discrete GPU market. To add to this, the company’s CEO was forced out by the board and the search for the new CEO took longer than investors expected. The lack of leadership and clarity of direction led to a decline in AMD’s stock. Nevertheless, AMD looks positive about its future and is willing to be more flexible in terms of architecture in order to survive the competition and penetrate new markets.
Our price estimate for AMD stands at $9.16, implying a premium of close to 25% to the market price. We are positive on the stock as we expect PC shipments to continue to grow driven by growth in emerging markets, AMD to gain share in notebooks and servers and discrete GPU shipments to rebound in later half of 2012.
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Growth in PC Shipments
Although the impact of floods in Thailand is likely to weigh in first half of the 2012, we believe that overall PC shipments will grow compared to 2011.  This will be driven by growing demand in emerging markets. Although Intel performed much better last year, AMD is likely to leverage the emerging market demand in 2012 and push its lower priced notebooks and desktops.
About 350 million PCs are sold globally including notebooks, desktops and netbooks. The growth is going to come from notebooks and given that countries like India and China have a combined population of over 2.5 billion, there is a potential for PC market to expand. Even if we assume that only 20% can afford PCs, that alone translates into 500 million potential buyers in these two countries. China has already become world’s biggest PC market and unless tablets can grab a large chunk of these incremental buyers, PC shipments will continue to grow.
Potential Share Gains
AMD performed well during the recent holiday season and powered about 70% of the retail PC sold on Black Friday.  The company also stated during its Q4 2011 earnings announcement that the low-power version of its next-generation Trinity APU chip provides mainstream performance and yet saves half the power compared to its previous notebook processors. The customer interest in this new chip has been good. The future PC growth will primarily be driven by notebooks and the positive side for AMD is that it gained market share in this segment last year. We expect further share gains for the next 2-3 years that will help drive AMD’s profits.
In addition to notebooks, we expect AMD to regain some of its server market share. The new bulldozer chips have been doing fairly well for AMD in server segment. Besides, Intel has gained an extremely large share in this market, and it will be very difficult for the company to continue on that track. The most likely consequence is that AMD will regain some of its lost share if it does not make any blunders in execution.
Although discrete GPU shipments will be affected in first half of 2012 due to shortage in hard drive supply resulting from floods in Thailand, the long term outlook looks better. The GPU attach rate has been improving over the last few years and we expect it to continue to do so. In fact last year Nvidia reported that notebook GPU attach rates improved from 33% to 36% in Q2 of its fiscal 2012. The consumers are increasingly adopting discrete GPUs as they use their notebooks and desktops for entertainment. Modern day entertainment is heavily based on visuals which are significantly enhanced by presence of discrete GPUs.
Additionally, AMD has significant opportunity to grow in professional GPU segment where it has very little share compared to Nvidia. 2011 demonstrated that AMD has capability to do so and over the course of next few years, we expect AMD to reach a share of close to 20% in professional GPU market.
Threats – More Competition, PC Cannibalization
A couple of threads for AMD include the entry of ARM-based players in the PC microprocessor market and the potential cannibalization of PC sales by tablets leading to a slowdown or even a decline.
The entry of more players in the PC microprocessor market can not only lead to a loss of share for AMD but also lead to pricing competition that can further play a role in shrinking AMD’s profits. We already incorporate these two factors in our forecasts, but the intensity to which they take effect will determine whether or not our price estimate is too optimistic.
Furthermore, there is a risk of some cannibalization of PC sales by tablets. If emerging markets can not make up for it, then there could be a downside to AMD’s price estimate. As PC sales suffer the pricing will suffer as well, thus exacerbating the effect.Notes:
- Flooding in Thailand will slow 2012 PC growth rate, digikey.com, Dec 13 2011 [↩]
- AMD’s Q4 2011 earnings transcript [↩]