Expect Ryzen And EPYC To Drive AMD’s Future Earnings Growth

AMD (NYSE:AMD)  has seen a strong jump in revenues in the recent quarters, led by higher sales of its Ryzen and Radeon products, along with EPYC processors. Ryzen processors are gaining popularity due to their competitive power at a relatively lower cost. The company plans to launch its 7 nanometer chips next year, which are expected to see strong demand. Also, EPYC processors are seeing strong growth, given its single socket design, performance, and lower cost. These trends should continue to drive growth for AMD in the coming years. We have created an interactive dashboard ~ What Will Drive AMD’s Near Term Earnings Growth. You can adjust the revenue and margin drivers to see the impact on the company’s overall earnings, and price estimate.

Computing & Graphics Will Drive Near Term Earnings Growth

We forecast the Computing & Graphics segment revenues to grow 40% to north of $4.2 billion for the full year 2018. This can primarily be attributed to the success of its Ryzen and Radeon products. Ryzen processors have seen strong demand in the recent quarters, given its superior performance and lower cost. For instance, AMD’s 2700X with eight cores and 16 threads is priced at around $300 while Intel’s 9900K, with eight cores and 16 threads is priced around $500. While Intel’s chip may have the upper hand in some of the performance metrics, AMD’s price point makes it very attractive. In fact, some of the reviews place AMD’s chip above Intel’s. Apart from Ryzen, AMD’s Radeon GPUs are also doing well, and we expect this trend to continue. The segment’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. We also expect the segment EBITDA margins to increase sharply to around 15% in 2018, backed by an increase in AMD’s market share as well as pricing.

Expect Enterprise, Embedded & Semi-Custom To Aid The Overall Growth

We forecast the Enterprise, Embedded & Semi-Custom segment revenues to grow in low double digits in the near term. 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 Microsoft, and Cisco, which will help sustain the momentum in its enterprise business. AMD’s EPYC single socket design processor can deliver better performance than many dual processor servers currently, and it costs less when compared to the offerings from its peers. While Intel controlled close to 99% of the server market share till last year, AMD’s management in the recent earnings conference call stated that they are on track to achieve server market share in mid-single digits. The company’s future earnings growth can partly be linked to how much market share it can gain from Intel.

Overall, AMD is rightly positioned for continued strong growth in the near term, with higher demand for its Ryzen and EPYC processors, and highly anticipated 7nm chips, that should fuel the demand and drive the future earnings growth. We forecast the full year EPS to be around $0.55, and use a TTM price to earnings multiple of 34.5x to arrive at our $19 price estimate for AMD, which is slightly below the current market price.

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