How Can AMD Reach $40 By Next Year?

AMD (NYSE:AMD) has been on a good run in 2018, with its share price soaring from $11 in January to over $32 in September, before cooling to $17 levels currently. We currently have a $19 price estimate for AMD, which is roughly at a 10% premium to the current market price. In this note we analyze the factors that could result in further upside to our price estimate toward the $40 levels by next year. We have created an interactive dashboard ~ Can AMD’s Stock Cross The $40-Mark In 2019 ~ highlighting the earnings expansion opportunities for AMD. You can adjust the drivers to see the impact on the company’s earnings and share price estimate.

AMD Will Have To Reach $1.90 In EBITDA Per Share Next Year To Be a $40 Stock

We forecast AMD’s price to EBITDA multiple of a little over 16x, and its EBITDA to be $1.15 per share in 2019 to arrive at our price estimate of $19. Assuming the multiple can grow higher to around 20x, AMD will need more than $1.90 in EBITDA per share, in order to be worth $40 per share. This is feasible if the company can successfully increase its market share from Intel, primarily in the server market.

EBITDA Per Share Expansion Opportunity 1: Ramp Up In Ryzen And EPYC Sales

AMD has been gaining share in the CPU market in the recent past, and it could continue to see higher sales given the success of its Ryzen and Radeon products. Several Ryzen mobile processor based notebooks from various OEMs (original equipment manufacturers), including Samsung and Lenovo, have been launched in the recent past. Apart from Ryzen, AMD has expanded its graphics card portfolio with its launch of Radeon GPUs, which are focused on the enthusiast gaming segment. Radeon products are performing well in the market, evident from the segment’s performance in the recent quarters. The company also plans to launch its new 7nm chips in 2019, which should aid the overall sales growth. These factors can potentially add an incremental $1 billion in Computing & Graphics segment sales.

AMD has also been gaining share in the server market 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 it has further gained market share. 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.  If the company manages to increase its share to the low teens, it will result in incremental revenues of over $1.5 billion. This kind of growth is possible for AMD, given the way EPYC demand has ramped up of late, and the company’s upcoming 7nm server chips.

EBITDA Per Share Expansion Opportunity #2: Margin Expansion Driven By Price Increases

AMD’s Computing & Graphics segment margins will need to increase by 300 bps. Enterprise, Embedded And Semi-Custom margins have the opportunity to rebound considering growth in EPYC processors. AMD will need to add nearly 600 bps to margins here. This is possible, as average selling price support from higher priced chips could continue to aid AMD’s margins. Higher demand for Ryzen and EPYC processors will give room for AMD to increase ASPs.

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