How Much Can EPYC Processors Boost AMD’s EPS Over The Next Three Years?

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We forecast AMD’s (NYSE:AMD) EPS to grow from $0.17 in 2017 to $1.20 in 2021 in our base case scenario. This growth will be led by higher revenues and margins for both Computing & Graphics, as well as  the Enterprise, Embedded & Semi-Custom segment. AMD is seeing strong demand for its Ryzen and EPYC processors, which have aided the company’s top line in the recent quarters. In this article we focus on the company’s EPYC processors. AMD’s share in the server market was around 1% in 2017, and it will likely increase to high single digits over the next few years. If the company manages to grow its market share to low teens, it would further increase our 2021 EPS forecast by over 15%, assuming no other changes to our forecast. This kind of growth is possible for AMD, given the way EPYC demand has ramped up of late, and the company’s upcoming 7 nanometer server chips, which will start shipping from 2019. Intel’s newer chips are delayed and this is boding well for AMD for now. We have created an interactive dashboard ~ How Much Can AMD’s EPS Grow Over The Next Three Years ~ on the company’s expected earnings through 2021. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, and earnings. Below we discuss the EPYC processors’ forecast in detail.

Expect AMD’s 2017-2021 EPS To Grow At A CAGR of Over 60%

We forecast AMD’s adjusted EPS to grow at a CAGR of over 60% to $1.20 in 2021. This can be attributed to higher revenues from both the segments, and increased margins. We forecast the Enterprise, Embedded & Semi-Custom segment revenues to grow in low double digits in the coming years, led by EPYC processors, 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 Intel. While Intel controlled close to 99% of the server market share till last year, AMD is confident of achieving mid-single digits share in the near term. The company’s future earnings growth can partly be linked to how much market share it can gain from Intel.

The overall X86 revenues were around $17.5 billion in 2017, with Intel accounting for most of these revenues (in mid-high 90s percent). This year AMD’s EPYC has seen strong demand, and Intel is likely to lose some of its share in the server market. In our base case scenario, we assume AMD will gain high single digit market share over the next four years. However, in a scenario if the company manages to increase its share to the low teens, it will result in incremental revenues of over $1.5 billion, which will translate into a 15% growth to our base case EPS forecast for 2021, as shown in the scenario on our interactive dashboard. This is very much doable for AMD, given its processors offers good performance at competitive pricing. Moreover, Intel is facing delays in its next generation of microchips, while AMD is ahead with its new 7nm chips, that will likely hit the markets in early 2019. This should further boost the demand for EPYC processors. The segment margins for AMD in 2017 declined sharply due to higher expenses related to datacenter. We expect margins to improve in the coming years, as higher demand for EPYC processors will give the company some room for higher ASPs. With Ryzen expected to perform well for the Computing & Graphics segment, we expect the overall margins to trend higher over the next few years, aiding AMD’s bottom line growth.

 

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