Here Is Why We’re Revising Our Price Estimate For AMD To $8

Recently, we revised our price estimate for AMD (NYSE:AMD) by nearly 45%, to approximately $8. However, our valuation for the company is still significantly lower than the current market price of $13 per share. Our price increase for AMD is mainly because of its strong performance in 2016 and a stronger future outlook. It should be noted that AMD has made considerable progress on its strategy to improve its business by gaining share in the graphics and PC markets, growing its semi-custom business, and expanding into the data center market. Below we detail the key reasons that led to an increase in our price estimate:

A) Share gains in the desktop processor market: AMD is set to launch the Ryzen family of processors based on the Zen-Core Architecture towards the end of March. At the CES 2017, the company showcased its Ryzen desktop processor for notebooks and desktops. AMD revealed around 17 “extreme performance” pre-built PCs built on the this device. Given that the high-end and the enthusiast segments of the PC market are still growing, AMD stands a chance to benefit by catering to these segments of the PC market with its Ryzen processors. Furthermore, the company is likely to see a renewed interest for its processors in the desktop and notebook processor market. This comes from the fact that the Zen core architecture is a major redesign by the company since the long-standing Bulldozer architecture. Furthermore, the Zen architecture is based on 14-nanometer FinFet process, as compared to the Bulldozer architecture which started on the 32nm.

With the launch of the upcoming processors, we can expect the average price per desktop processor sold by AMD to increase going forward. Previously, we expected the average price per desktop processor sold by AMD to reach $11 by the end of our forecast period. However, we now expect the figure to reach $14 in the terminal year. This translates to a 6% increase in AMD’s desktop processor revenues in the terminal year.

B) 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 received 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 Intel’s microprocessors and Nvidia’s accelerators.

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 a newly formed JV with China based Tianjin Haiguang Advanced Technology Investment Co. The JV will use the technology to develop microprocessors 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. In 2012, the company announced its collaboration with ARM Holdings to design server processors using the ARM technology in addition to its x86 processors for multiple markets.

Previously, we expected AMD’s server processor market share to reach 4.5% by the end of our forecast period. However, we now expect the figure to reach 5.5% in the terminal year. This translates to a 40% increase in AMD’s server processor revenues in the terminal year.

See our complete analysis for AMD here