Advanced Micro Devices (NASDAQ: AMD) is a fabless semiconductor company primary involved in designing x86 microprocessors. The company offers CPUs, APUs, GPUs and embedded processors for personal computers, laptops, servers, data centers and thin client applications. Graphics business of AMD serves gaming enthusiasts and professionals. AMD is still using a 28nm process technology for its products. The company is targeting to move to FinFET in 2016 with its new Zen architecture in CPUs. Upcoming GPU, codenamed Arctic Islands, will also be based on FinFET 14nm or 16nm. AMD operates through two business segments: Computing and Graphics segment and Enterprise, Embedded and Semi-Custom segment. Computing and Graphics segment primarily includes desktop and notebook processors, chipsets, discrete graphics processing units (GPUs) and professional graphics. Enterprise, Embedded and Semi-Custom segment primarily includes server and embedded processors, semi-custom System-on-Chip (SoC) products, development services and technology for game consoles.
Source: Prudena
Net sales of AMD totaled $1.9 billion during the first half of 2015, a decrease of ~30% on a year-over-year basis. During the first half, sales from the Enterprise~ segment surpassed CPU, GPU segment sales. AMD generated 56% of its sales from Enterprise, Embedded and Semi-Custom during the period. Rest of the revenue came from Computing and Graphics segment. Computing and Graphics is witnessing a continuous decline, sales decreased 59% on a year-over-year basis during Q2 2015. Advanced Micro Devices, Inc. was founded in 1969 and is headquartered in Sunnyvale, California.
The bull case
AMD has shifted its focus from PC to avoid sluggish growth and mainstream competition from Intel (INTC, Financial). The company generated more than half of its revenue from Enterprise~ segment during 1H 2015; 13% growth was recorded sequentially. Specifically, the company is benefiting from thin client space and has some new design wins from Hewlett Packard and Samsung. AMD is focusing on gaming, immersive platforms and data center infrastructure to reduce its PC exposure. The company claims that it currently generates more than $1.5 billion revenue from immersive platforms. Data center holds promise for the company amid ARM custom cores and use of advance process technology going forward. Gaming market is expected to reach $102.9 billion by 2017. With a first mover’s advantage in HBM, AMD will benefit from the growth of gaming. First iteration of HBM based GPU failed to impress compared to NVIDIA’s products but upcoming iterations with a new process technology can get AMD ahead of NVIDIA. Virtual reality and 4K will continue to increase the demand for AMD’s graphics going forward.
FinFET and Zen can act as a major tailwind for the company amid an inherently superior design. 2015 is proving to be a challenging year for AMD. However, this will change after the launch of Zen based products. The company’s Zen architecture will be transformed into products through FinFET process technology. AMD’s biggest problem was a lagging process node. It will change during 2016, and the company will probably compete head to head with Intel in the PC space. Note that AMD’s processors based on lagging technology managed to beat Intel’s leading node processors on several instances; 3D Mark and PC Mark had shown Kaveri, a 28nm, beating Haswell, which is a 22nm. Due to HSA capabilities, AMD has inherent design superiority over Intel. Given competition on same process node, AMD will give Intel a run for their money. That’s why Zen is of key importance going forward. Further, K12, a custom ARM core will place AMD to benefit from the data center growth in coming years. AMD’s move into ARM increases the total addressable market of the company. AMD can leverage its CPU and GPU design capabilities to build a differentiated ARM core. As Intel is not pursuing ARM, opportunity for AMD is huge. Current ARM players like Qualcomm don’t hold HUMA capabilities that can be used by AMD for ARM custom cores. All in all, custom core is a promising opportunity for AMD.
Embedded market holds promise for AMD. Embedded market will also fuel AMD’s growth. The company is better positioned than Nvidia in embedded space due to differentiated CPU capabilities. Nvidia does have strong GPU capabilities but embedded systems generally require integrated CPU/GPU function making AMD’s products a better match for embedded applications. Moreover, new console iterations will add to the bottom line of Advanced Micro Devices in coming years.
There are immediate tailwinds; bankruptcy risks are overrated. Looking short term, the management is aiming to return to profitability during the second half of 2015. This will be supported by the launch of Windows 10 and new MacBook Pro with AMD graphics. Debt is touted as a risk, but none of the company’s debt is maturing until 2019, which gives AMD ample time to execute its Zen and K12 plans. The company is also maintaining its cash above the target minimum of $600 million. Currently, the chances of bankruptcy are remote as the second half is going to be profitable for the company.
To review, the end of Intel’s process lead will change the competitive landscape of x86 micro processing. AMD can utilize the leading edge process from foundries like Samsung, GloFo and TSMC. Samsung’s 10nm mass production is expected by the end of 2016. From 2016 onwards, Intel won’t have process technology lead. AMD, on the same process, is set to gain market share during 2016 and beyond.
The bear case
Despite the future outlook and promises, AMD is playing catch up in process technology.Despite the future outlook and promises, AMD is playing catch up in process technology. Consequently, the company is consistently losing market share and is forced to sell its products at a sub-par margin. Recent HBM venture didn’t prove successful as Fury X was not impressive relative to Nvidia’s offerings. This creates uncertainty regarding AMD’s GPU performance against Maxwell. AMD has been shedding GPU market share since Q2 2014, according to Jon Peddie Research. The situation is not expected to get better in the short term as evident from Fury X reviews; the card came up short of Nvidia’s identical priced flagship.
Financial results are alarming. Computing~ segment revenue declined 54% during Q1 2015. Gross margin declined from 35% in Q2 2014 to 25% in Q2 2015. R&D spending is down 23% since Q2 2012. AMD is lagging behind Intel and Nvidia in R&D. This indicates that AMD might not be able to match Intel and Nvidia in design efficiency going forward.
The company dumped a growing business: Sea Micro. Exit from dense servers is not a good move; the business could have complemented AMD’s ARM server processors and ARM cores, especially K12. Dense server is a going space; AMD might have capitalized on the growth even by using Intel’s processors. Now, that, the company competes with Intel directly for selling server processors, it may not turn out to be good experience. Intel spends more than $2 billion on data center R&D; AMD will have a hard time capturing market share. Other short-term bearish indicators include negative earnings revisions; five estimates moved downwards during the past thirty days. Book value of the company is approaching zero, which makes AMD a questionable proposition for value investors.
Bottom line
Roadmap of AMD looks good. Zen, FinFET and K12 will help AMD gain share across several end-markets. HSA and HUMA will help AMD outperform Intel on a similar process node. There is no question that AMD will gain market share if it delivers Zen on FinFET and timely brings K12 to the market. But, AMD has a history of execution related problems. Decisions have not been intelligent in the recent past, think SeaMicro. Therefore, AMD seems to be a bit of a speculative play. However, if there is certainty about Zen and K12 launch, then AMD is set for big gains during the next couple of years. The stock has already trading quite low, which creates a decent opportunity for investors with a high appetite for risk.
A different version of this article with a valuation focus appeared on Prudena.
