How Sensitive Is AMD To Its EBITDA Margin Change?

by Trefis Team
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We estimate that AMD’s (NYSE:AMD) EBITDA will likely double in 2018, primarily led by its Computing & Graphics segment, which has seen solid growth of late, led by its Ryzen and Radeon products. We have created an interactive dashboard on AMD’s sensitivity to changes in its EBITDA margin. Note that you can adjust the margin drivers, and see the impact on AMD’s overall valuation and price estimate. Below are some of the charts and data from the interactive dashboard.

Expect Computing & Graphics Segment EBITDA Margins To Rise Sharply In The Near Term

We forecast AMD’s EBITDA margin separately for its Computing & Graphics, and Enterprise, Embedded & Semi-Custom segments. Computing and Graphics EBITDA margin declined from 8.3% in 2012 to -22.5% in 2015, mainly on account of the drastic decline in AMD’s computing segment revenues and inventory write-off. However, margins improved to 8.0% in 2017 backed by an increase in AMD’s market share as well as higher pricing. We expect the figure to improve further to around 16% by the end of 2019. Given the difference in Intel & AMD’s margins, it appears that there is still plenty of room to grow for AMD.
However, the future market will be more competitive which could lead to pressure on margin growth. The entry of ARM-based players can increase the rate of innovation in the industry and yet not leave much room for pricing growth. This will likely cap the upside for AMD’s margins. In the near term though, the segment margins will likely see a solid uptick led by its Ryzen and Radeon products. 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 prices. We believe that the company’s near term growth can be linked to the ramp up of Ryzen and Radeon. In fact, the company’s reported segment operating margin grew from -3.7% in Q1 2017 to 12.3% in Q1 2018.
Looking at AMD’s Enterprise, Embedded, and Semi-Custom segment, we forecast the EBITDA margin to grow by 300 basis points (y-o-y) to 12.6% in 2018. This can be attributed to 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.

Note that the margins used in our calculation are adjusted margins. We adjust EBITDA figures to exclude non-cash charges. If EBITDA Margin for both the divisions grow at a slower pace than expected with Computing & Graphics margin of 13.5%, and Enterprise, Embedded and Semi-Custom margin of 12.5% by 2019, it would result in a 16% decline in our valuation for the company. On the other hand, if margins were to increase to 19% and to 18% for both the segments respectively over the same period, there will be a 13% upside in our price estimate.


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