Can EPYC Server Processors Boost AMD’s Value By 25%?
AMD (NYSE:AMD) has made some improvements to its product lines in the last few years, but its stock remains risky considering its relatively low and fluctuating margins. It launched its EPYC line of server processors earlier this year to compete with Intel (NASDAQ:INTC) which has long dominated this market. The initial traction and reviews have been positive, and this could present AMD an opportunity to grab some share and give a boost to its valuation. Take a look at our interactive breakdown of AMD’s business which shows how AMD can add 25% to its value by expanding in the server market.
Our price estimate for AMD stands at $10, implying a slight premium to the market price.
AMD’s Value Can Jump 25% By 2019 If EPYC Processors Can Capture 10% Server Market Share
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If AMD gains a 10% share in the server processor market, it would imply a nearly 25% upside to its EPS, which would drive a similar upside to our price estimate assuming the valuation multiples remain constant. So how can EPYC server processors gain that market share? We believe that AMD can benefit from EPYC chips’ lower cost, and simplification of the future development roadmap. In addition, its performance per watt is attractive and the company has seen some good traction lately.
How 10% Market Share Gain Can Lead To 25% Increase In EPS
We expect the global server CPU shipments in 2019 to reach 26 million, meaning a 10% market share gain will imply 2.6 million server CPUs shipped. Therefore, the incremental server revenue (part of Enterprise, Embedded & Semi-Custom Revenue) would be roughly $1.4 billion assuming average processor pricing of $550. This would increase AMD’s EBITDA by around $250 million (18% EBITDA margin) and lead to incremental earnings of about $160 million, or 17 cents per share. This, in turn, would imply a 25% jump in EPS in 2019, and even more upside in the long run.
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