AMD-ARM Collaboration Can Give AMD’s Server Business New Life

by Trefis Team
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With a decline of 62%, AMD (NYSE:AMD) is the worst performer on the Philadelphia Semiconductor Index (SOX) this year. [1] Marking a 10% sequential decline in revenues and net loss of $157 million in Q3 2012, the company posted yet another quarter of dismal performance. Apart from the slowdown in global PC shipments, internal factors such as change in leadership, a manufacturing glitch last year and the company’s slow response to rapidly changing consumer needs has contributed to declining investor confidence in AMD’s stock.

While the situation is expected to persist for the next few quarters, AMD declared its restructuring plans in its latest earning call which should help steer the company from these tough times and return to profitability in the coming years. (Read: Amid Dismal Results AMD Remains Upbeat On Its Restructuring Plans)

See our complete analysis for AMD

This week AMD took yet another bold step by announcing its intention to design ARM technology based processors in addition to its x86 processors for multiple markets, starting with cloud and data center servers. The new generation server products will start production in 2014.

Currently, Intel (NASDAQ:INTC) and AMD are the only companies that are working on the x86 architecture. However, the collaboration with ARM will make AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems. With the ARM licenses, AMD plans to develop Opteron based server parts that integrate ARM’s technology with its own architecture.

Potential Increase In AMD’s Market Share

AMD has seen its server market share decline from 15% in 2007 to 5.5% in 2011, mainly on account of Intel’s Xeon processors. However, with the launch of its Bulldozer architecture, AMD registered a steady increase in demand for its high-end server processors.

Certain players such as Nvidia (NASDAQ:NVDA) are developing ARM-based chips for servers and plan to enter the market in the near future. While this poses a major threat to both Intel and AMD, we think that collaborating with ARM Holdings could give AMD an edge as, unlike other ARM-based players, it already has certain expertise in the market. However, on the flip side, the wide timeline leaves an opportunity for AMD’s competitors to retaliate which might negate any potential advantage that AMD could have.

AMD claims that its suite of processor and graphics IP, third-party processor cores and SeaMicro’s innovative supercomputer fabric will enable it to deliver differentiated solutions. We estimate the company will register a continuous increase in market share over our forecast horizon. If you differ from our view, you can change the estimate in the graph below to see the resultant impact on AMD’s valuation.

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  1. AMD Plans to Use ARM Designs in Chips for Servers in 2014, Business Week, October 30, 2012 []
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