Major Trends Behind Our $8.40 Valuation For AMD

by Trefis Team
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AMD (NYSE:AMD) manufactures and markets microprocessors used in servers, desktop PCs and notebooks. It also manufactures Graphics Processor Units (GPUs) used in PCs to process information for graphic displays. AMD faces competition from PC microprocessor maker Intel (NASDAQ:INTC) as well as mobile chip companies such as Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM). Last year was a tough one for the company as it failed to keep up with the changing consumer trends, which eroded investor confidence. Here we look at  some of the trends that may affect its performance and in turn could impact our current valuation of $8.39 for the company.

See our complete analysis for AMD

Global PC Trends – Hard Disk Drive Shortage & Unfavorable Economic Environment

Last year, we saw a slowdown in PC shipment growth mainly on account of two factors.

First was the hard disk supply shortage caused by flooding in Thailand. The floods impacted the operations of almost all the players in the PC supply chain.  We are of the view that, as a result of the shortage, original equipment manufacturers (OEMs) will likely give preference to high-end PCs, which might be disadvantageous to AMD that sells lower-priced processors compared to Intel.

The second factor that impacted PC sales was a slowdown in overall economy. Combined with market dynamics favoring mobile devices such as tablets and smartphones, the soft economy continues to negatively impact PC shipments. Research firm Gartner predicts that the market will remain weak in 2012 and forecasts PC shipments to grow at a moderate 4.4% in 2012. [1]

The desktop and notebook processor market contribute around 50% to our price estimate for AMD. Hence, trends in the PC market will have a significant impact on our valuation. We believe that the effects of the hard disk drive shortage will persist in Q2 2012, with the market reviving thereon. Additionally, the potential in emerging economies will be the driving force for growth, countering a slowdown in the developed markets. Hence we expect the PC market (except netbooks) to see a 4.7% growth in 2012.

Increasing Importance of Smartphone Chips

Smartphones and tablets are expected to replace PCs as the growth engines for the semiconductor market. According to research firm Gartner, the worldwide mobile devices sales to end users will grow by about 7% in 2012, mainly fueled by growth in smartphones and tablets. [2].

We expect the smartphones sales to reach the 1 billion by end of our forecast period. Improving mobile network speeds, growing awareness of smartphones, multiple options present in the market and innovation from smartphone manufacturers will continue to drive this growth.

With its long-time rival Intel having already marked its entry in the smartphone segment with the recent launch of Intel-powered smartphone by Lava International, AMD might once again lag behind if it fails to keep up with the changing trends. It is expected to come out with its tablet chip code-named Hondo this year, but AMD is yet to mark its entry in the smartphone space.

Expanding Notebook Market

There has been a significant shift from desktops to notebooks in the last few years. The inflection point was the third quarter of 2008 when the shipment for notebooks outpaced desktops, heralding the advent of notebooks in a big way. Around 177 million notebooks  were shipped in 2011 globally, and we expect this figure to reach past 249 million by the end of our forecast period.

With the recent launch of its 2nd generation Trinity APUs with a greater battery life and almost double the performance per watt, AMD can target the next generation of low-power ultra portable laptops. (See Our Article on AMD’s Trinity Chips). We forecast AMD’s market share in the notebook segment to remain constant over our forecast period.

Entry of ARM-Based Players in the PC Market

The PC market, which has traditionally been dominated by x86 processor architecture, is likely to open up with the slated entry of ARM-based players in 2012. Windows 8 will be ARM-compatible, which is likely to threaten the current share that companies such as Intel and AMD enjoy.

Server Virtualization Drives the Need for Newer Servers to Replace Older Ones

Server virtualization is essentially server consolidation which enables the running of multiple applications on a single server instead of multiple servers, resulting in reduced costs of hardware, electricity and service. Growth in cloud computing and data intensive computing is constantly increasing the need for faster, better servers. We forecast the server market to reach the 15 million (units) by the end of our forecast period.

With the acquisition of SeaMicro and the launch of bulldozer-based chips, AMD might well be in the position to regain some if the lost ground in the server market.

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Notes:
  1. Gartner Says PC Shipments will Grow 4.4% in 2012, Gartner Press Release, March 8, 2012 []
  2. Gartner Says Worldwide Smartphone Sales Soared in Fourth Quarter of 2011 With 47% Growth, Gartner Press Release, February 15, 2012 []
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