AMD Is Doing Well, But Market May Be Overconfident

by Trefis Team
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AMD (NASDAQ:AMD) has done well this year, and has maintained the relatively high valuation that it reached towards the end of last year. Its overall revenue has grown roughly 19% in the first half of the year, but almost all of that growth has come from its computing and graphics division. Its enterprise, embedded and semi-custom business, which represents a large addressable market, has underperformed, declining 1% during the first half of 2017. We believe that AMD is in a fairly strong position, and will certainly benefit from the tailwinds of growth in gaming, crypto-currency, and strong adoption of its new Ryzen desktop processors. However, investors may be over-enthusiastic about the company’s prospects, and discounting the lull in the embedded and semi-custom business as well as the potential impact of Intel’s new line of Xeon scalable processors. AMD may well be able to make some inroads in the Intel-dominated server market, but that remains to be seen. Our price estimate for AMD stands at $9, implying a nearly 25% discount to the market.

Ryzen CPUs Have Given Investors A Valid Reason To Be Enthusiastic About

Global semiconductor sales jumped 22.6% year-on-year in May 2017, reaching $31.9 billion. This bodes well for all players, including AMD. With the timely launch and adoption of Ryzen, AMD can capitalize on the growing demand. A reputed CPU benchmark site has reported that the share of AMD processors being submitted for performance benchmark testing has jumped significantly this year. This, coupled with the observed growth in AMD’s computing and graphics division in Q2 2017, gives us reason to believe that AMD is making a meaningful comeback.

This improvement can be attributed to its launch of Ryzen CPUs, which have shown some promise of delivering competitive power at a relatively lower cost. The company’s Ryzen Threadripper CPU aimed at high performance applications could potentially help it chip away Intel’s share further. AMD stated during its second quarter earnings call that all major original equipment manufacturers (OEMs) have announced Ryzen-based desktop systems, and the company expects to see a further sales boost in the holiday season. What’s encouraging to see is that Ryzen’s ramp up led to a nearly 30% increase in average selling prices for AMD. This suggests that customers are placing an emphasis on higher computing power. AMD still generally has a price advantage over Intel, and improvements in computing power can help it capture additional share.

Beware Of These Risks

AMD has been profitable this year, but its profit history is fairly erratic. AMD has a strong chance to take some market share from Intel, but we believe the biggest opportunity lies in the data center market, which is relatively slow to change and has additional competition such as Nvidia. We believe it is prudent to wait and see how Intel’s new Xeon scalable platform will help it defend its dominant position in the data center market. The company has been touting the platform as the biggest improvement in a decade. Finally, AMD’s embedded and semi-custom business, which we believe could be the company’s biggest value generator, has seen a slowdown this year. Overall, while there is much reason for optimism for AMD, we believe there remains just as much uncertainty.

See our complete analysis for AMD

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