Indian Bollywood actress Gul Panag with AMD chip
Advanced Micro Devices competes with Intel and Nvidia in the PC microprocessor and computer graphics market. AMD’s main product lines include desktop microprocessors, notebook microprocessors and server microprocessors which contribute about 32%, 30% and 21% to AMD’s stock respectively as per our estimates.
Our price estimate for AMD stands at $9.50, implying a near 40% premium to the market price.
Summary of Key Drivers
AMD’s share in notebook processor market: We estimate that AMD’s share in notebook processor market has fluctuated between 17% and 12% in the past and currently stands at a little under 14%. We expect AMD to gain share in the future.
Global notebook shipments: Global notebook shipments have increased from about 62 million in 2005 to close to 160 million in 2010. Going forward we expect the growth to continue but at slower pace.
AMD’s share in server processor market: AMD’s share in server processor market has fallen significantly from its peak of about 25% in 2006 to just 7% in 2010. Going forward we expect some recovery.
Global desktop shipments: Global desktop shipments have declined for past few years with some recovery in 2010. We expect flat growth in shipments going forward.
EBITDA margins for desktop, notebooks and servers: We apply same ebitda margins to each of these segments. These margins declined to as low as 4.4% in 2007. However since then they have recovered to about 17% in 2010. Going forward we expect further recovery.
45% upside scenario: $13.70 Trefis price estimate for AMD stock
Increasing AMD’s notebook processor market share (+6%)
AMD’s share in the notebook processor market has been improving after its dip in 2008, but we expect this trend to continue and there is a strong possibility that given AMD’s new Llano chips with good graphics capability integrated within can help it do just that.
Hewlett-Packard is making a significant marketing push with new notebooks powered by AMD, which could help lift market share. If market share reaches historical highs of around 17%, there could be an upside of about 6% to our price estimate.
Notebooks shipment growth doesn’t suffer much (+5%)
We currently forecast notebook shipments to grow more slowly than in the past. Research firms like Gartner have mentioned that PC growth has slowed in part due to tablets.
This is relatively new focus for AMD and it competes with entrenched players. Therefore some of the uncertainty around AMD’s stock relates to how notebook market will grow. If emerging markets can fuel notebook growth such that global shipments reach to 250 million by end of our forecast period compared to current forecasts of around 220 million, our price estimate for AMD can see upside of about 5%.
AMD regains much of the lost share in server processor market (+8%)
AMD made quite a mark in the server market back in 2006 but Intel bounced back strongly with its introduction of Xeon 5100. AMD’s loss was further compounded when it was late with its Barcelona chip in 2008. AMD hasn’t really recovered since then.
However, we believe that market share has bottomed especially with its bulldozer chips. The company claims that its processors will be better suited in cloud computing environments where CPU utilization is high. If true, AMD should gain further market share by relying on its partnerships with OEMs. If market share reaches 2007 levels of 15% (higher than our current forecast of 12%) there can be about 8% upside to our price estimate.
Processor EBITDA margins improve significantly (+25%)
AMD’s margins have suffered significantly in the past as a result of increased manufacturing costs and price competition. However they started recovering in 2008 and have trended higher.
Intel maintains much higher margins, and we don’t expect this gap to narrow meaningfully in the near-term. Nevertheless there is still room to grow, and we forecast AMD can obtain margins of about 22% by end of our forecast period. Given that new APU chips are likely to be higher priced and assuming that AMD can get to an increased and stable market share, its margins have upside potential.
If these rise to around 25% (for all three processor market segments), there can be a material upside of about 25% to our price estimate.
32% downside scenario: $6.40 Trefis price estimate for AMD stock
Notebook shipment growth stumbles (-12%)
It tablets replace notebooks then the notebook growth will drop off. Though there is a possibility that tablet fever might die down and ultrathin notebooks might appeal to consumers, every mobile device company is looking at tablets as they they become increasingly powerful – some with dual-core processors coming into the play. If notebook market growth stumbles, our price estimate for AMD can see a downside of about 12%.
Desktop shipments decline (-5%)
We forecast flat growth in desktop shipments given the trend towards notebooks, netbooks and now tablet computers. We believe that our forecasts run a risk of being too optimistic and there is a chance the desktop sales decline. Currently we forecast about 143 million desktop sales at the end of our forecast period. However if global desktop sales decline to about 125 million by end of our forecast period, there could be downside of about 5% to our price estimate for AMD.
Lower growth in processor EBITDA margins (-15%)
Although we expect that margins will improve assuming AMD gets higher and more stable market share in the processor market, the extent to which they can improve is up for question.
The margin improvement risk results from the possibility that the PC processor market experiences significant weakness and AMD might have to cut prices to stimulate demand. If these margins grow to just 20% (vs. our current forecast of 22% by end of our forecast period) there could be downside of about 15% to our price estimate
Additional Note – Some of the above downside can be mitigated by AMD doing better in tablet market. Since this is a very new area for the company, we haven’t incorporated it in our model yet and plan to do it soon.
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