A Look At Our $12 Valuation For AMD

by Trefis Team
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AMD (NYSE:AMD) has seen solid growth in the recent quarters, primarily led by its Computing and Graphics segment. The segment is benefiting from higher sales of Ryzen and Radeon products, and we believe this trend will likely continue in the near term. Ryzen CPUs are gaining popularity due to their  competitive power at a relatively lower cost. Given the success of Ryzen, the company was able to increase its average selling price in double digits. We believe that the company’s near term growth can be linked to the ramp up of Ryzen and Radeon. However, in the long run, we believe that the Enterprise, Embedded, and Semi-Custom segment will drive the earnings growth. We have created an interactive dashboard analysis which you can use to arrive at your own price estimate for the company by modifying the various drivers.

Expect Ryzen And Radeon To Drive Near Term Growth

AMD launched premium Ryzen 7 processors in March 2017 and the enthusiast-class Ryzen 5 processors in April 2017. A number of Ryzen-powered systems were rolled-out by major OEMs (original equipment manufacturers) since last year. The company also extended the product line into the mainstream desktop and premium notebook markets with the launches of Ryzen 3 CPUs and Ryzen mobile APUs. The company’s Ryzen Threadripper CPU aimed at high performance applications could potentially help it chip away at Intel’s share further.  AMD still has a price advantage over Intel, and improvements in computing power can help it capture additional share. Apart from Ryzen, AMD has expanded its graphics card portfolio with its launch of Radeon, which are focused on the enthusiast gaming segment. These new GPUs have 8GB of HBM2 memory and deliver peak performance of 13.7 TFLOPS. Both of these products are performing well in the market, evident from the segment’s performance in the recent past. The segment revenues grew 54% in 2017, and 95% in Q1 (y-o-y). We expect the revenues to grow 40% to north of $4 billion in 2018.
Looking at the company’s Enterprise, Embedded and Semi-Custom segment, we expect high single digit revenue growth in 2018, primarily led by its EPYC processors, which saw shipments doubling in Q1 2018 (q-o-q). AMD’s EPYC processor is finding increasing acceptance among corporates, including the likes of Amazon and Tencent. Recently, Dell EMC and Cray also added EPYC processors to their line of offerings. This should help sustain the momentum in its enterprise business.
Our $12 price estimate for AMD is based on $0.53 expected EPS in 2018 and a price to earnings multiple of a little under 23. Our revenue forecast of $6.7 billion represents year-on-year growth of around 25%. Of the total expected revenues in 2018, we estimate $4.2 billion in the Computing and Graphics segment, and Enterprise, Embedded and Semi-Custom making up for the rest. Our price estimate of $12 for AMD is at around a 5% discount to the current market price.


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