Keys To AMD’s Continued Growth

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AMD: Advanced Micro Devices logo
AMD
Advanced Micro Devices

AMD (NYSE:AMD)  generates its revenues from its Computing & Graphics, and the Enterprise, Embedded & Semi-Custom businesses. The Computing & Graphics business includes AMD’s microprocessors, as well as graphics processors (GPUs) that are used in desktops and notebooks. Ryzen and Radeon products are part of this group. Note that AMD has seen stellar sales growth for its Ryzen products in the recent past, and this trend will likely continue in the near term, and drive the company’s near term earnings growth. We have created an interactive dashboard ~ What Are AMD’s Key Sources of Revenue. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate.

Expect Computing & Graphics Segment To See Strong Growth In The Near Term

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The Computing & Graphics segment accounted for 57% of the company’s revenues in 2017, and we forecast the contribution to increase to 63% in 2018 and 2019, led by a ramp up in sales of its Ryzen processors. The segment revenues have seen strong growth over the past few years, and increased from $1.8 billion in 2015 to $3 billion in 2017. Several new notebooks are being launched with the Ryzen processor, and this should help the company gain market share. Note that Ryzen unit shipments grew in double digits sequentially in Q2 2018. Apart from Ryzen, AMD’s Radeon GPUs are also doing well. We forecast the segment revenues to grow by around 40% to $4.2 billion in 2018. However, we forecast growth to moderate from 2019. AMD’s future growth can partly be linked to its 7nm chips, which it plans to roll out in 2019. If the company is able to deliver on its 7nm chip, it will allow it to better compete with Intel and gain further market share.

Expect Enterprise, Embedded & Semi-Custom To See High Single Digit Growth

The Enterprise, Embedded & Semi-Custom segment includes AMD’s embedded and system-on-chip products, as well as server microprocessors. The segment revenues have been hovering in the range of $2 – $2.4 billion over the past few years. However, we forecast the company to see high single digit growth in the coming years. This can be attributed to AMD’s EPYC processor, which is finding increasing acceptance among corporates. In fact, AMD has signed some significant new deals with large corporates, including Cisco and HP Enterprise, which will help sustain the momentum in its enterprise business. The company saw a 50% jump in volume sequentially in Q2 2018.

While we forecast strong top line growth for AMD, we maintain our price estimate of $17, which is much lower than the current market price of over $30. AMD’s stock price has been on a stellar run in 2018, and has nearly tripled (year-to-date). The current market price appears to be way above the consensus range. In fact, the average target price of AMD is $18 (among 30 analysts), as per the data compiled by The Wall Street Journal. Our current price target of $17 is based on expected EPS of $0.52 per share in 2018, and a TTM price to earnings multiple of 33x. Note that you can adjust the revenue and margin drivers on our interactive dashboard to arrive at your own price estimate.

 

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