AMD (NASDAQ:AMD) intends to reduce its exposure to the declining traditional PC market from around 95% last year to below 50% in the next few years. The company claims to be on track to derive 20% of its revenue from non-traditional PC markets by the end of this year. 
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Declining PC shipments combined with internal factors such as the change in leadership, a temporary manufacturing glitch and a slow response to rapidly changing consumer needs negatively impacted AMD’s growth in 2012. The company announced a three part restructuring plan in Q3 2012 in an effort to strengthen its competitiveness in the market and better manage its expenses and cash.
The first stage – restructuring its operations – is now complete. We believe that its Q1 and Q2 earnings this year confirm that its restructuring efforts have started paying off. In the second stage, AMD intends to focus on executing its new product plan to accelerate growth. Lastly, it intends to derive 40%-50% of its revenue from high growth business, including semi-custom, ultra-low power client, professional graphics, dense server and embedded solutions, in the next two to three years.
In this article we discuss AMD’s progress and current strategies in some of these growth segments.
A Broad Embedded Products Portfolio To Target Different Segments
Earlier this week, AMD announced its future road-map for the fast growing embedded computing market. In addition to 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. The new products lineup will start shipping next year onward.
As per a recent VDC Research report, the market for traditional and intelligent embedded CPU systems will grow 36% in the next few years, from 330 million units in 2013 to over 450 million units by 2016. The x86 and ARM architecture together are estimated to account for 82% of the total addressable market. 
AMD now has a broad range of embedded processors for different segments in its portfolio, offering a number of price, performance and power options to meet the needs of embedded designers. We estimate embedded processors to contribute around 16% to AMD’s valuation and forecast revenue from this division to cross $1 billion over our review period.
Increasing Presence In Game Consoles To Diversify Revenue Base
AMD devised a unified gaming strategy in March this year that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. It 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 (NASDAQ:MSFT) Xbox One. AMD believes that gaming is one of the key pillars of its embedded custom chip business. Despite stiff competition from other forms of gaming, game consoles account for 42% of the $65 billion global video game market. 
Previously AMD’s graphic technologies were integrated into Microsoft Xbox 360, Nintendo Wii and Nintendo Wii U. AMD has never sold GPUs for game consoles, but received royalties for each console that utilized its graphics technology. However, the next generation Microsoft and Sony game consoles will utilize AMD’s system-on-chip Jaguar core and Radeon HD graphics chips. In short, AMD will now sell chips to these players instead of licenses.
Though the gaming business offers lower gross margins compared to the corporate average, AMD claims that the same has comparatively lower operating expenses, and consequently high operating margins, as its customers fund a large portion of the engineering expense. For the next few quarters, AMD expects low double-digit operating margin for this business which it believes will more than offset the impact of lower gross margin.
AMD anticipates 22% sequential growth in revenues this quarter and expects the upcoming semi-custom SoC products for Sony and Microsoft to be the primary drivers.
Temash To Help Leverage Growth In Alternate Markets
In addition to the small form-factor notebook, AMD’s recently introduced Temash platform targets the fast growing tablet and hybrid market segments. Temash is the industry’s first quad-core x86 SoC and promises significant performance and power improvement over its predecessor. It offers a longer battery life and is specifically targeted at high performance tablets that can run full HD games and productivity applications.
Temash targets notebooks in the $350 – $550 range, which has been AMD’s strong point historically. It has a number of upcoming touch-enabled Windows 8 notebooks at the $399 price point and intends to target the fast growing 7 inch form factor tablet market.
Though AMD launched its Temash platform a few months ahead of Intel’s Bay Trail, it faces stiff competition from Intel as the company intends to extend its product line across screen sizes and price points in both tablets and PCs. In its recent earnings call, Intel announced that tablets powered by its processors could be available for as low as $199 and below in the future.
Collaboration With ARM To Help Tap Growth In Servers
With new improved servers, its industry-leading graphics processing capabilities and its strategy to embrace both the x86 and ARM architectures, AMD remains committed to regain its share in the server processor market. In October 2012, it 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. Code-named Seattle, AMD claims that the ARM-technology based server processors will be faster and more powerful than its existing low-power x86 server processors. The chips will start sampling early next year and will start volume production by the second half of 2014. AMD believes that ARM CPUs have the potential to account for 20% of the server market by 2016 or 2017. 
Additionally, with the acquisition of SeaMicro (which makes ultra-dense servers) last year, AMD is better positioned with strong IP and an enhanced product offering to leverage growth in mainstream server-computer market. By offering manufacturers and data-center operators cheaper and more power-efficient processors,we believe that AMD will manage to re-gain some of its market share from Intel. (Read: Here’s How AMD Can Recapture Its Lost Server Market Share)
Our current price estimate of $3.76 for AMD is in line with the current market price.Notes:
- Advanced Micro Devices Management presents at Citi Global Technology Conference (Transcript), Seeking Alpha, September 4, 2013 [↩]
- AMD Details Embedded Product Roadmap, AMD Press Release, September 9, 2013 [↩]
- Microsoft: Global video-game market hits $65 billion, and consoles still lead the way, Geek Wire, May 17, 2013 [↩]
- AMD reboots server technology strategy with first ARM chips, Tech World, June 18, 2012 [↩]