Advanced Micro Devices (AMD, Financial) has been doing quite well in the past couple of years.
The company finally caught up with Intel in process technology, and things are looking good as the launch of 12nm based Ryzen+ is approaching. On the server side, the story also seems rosy. Server chip EPYC has garnered interest from top cloud players including Microsoft (MSFT), Baidu (BIDU) and Tencent (TCEHY). The single socket (1S) strategy has started to pay off for Advanced Micro Devices in the servers market. Leading server hardware vendors like Dell (DVMT) EMC are making EPYC based models available for customers. On the GPU side, APUs based on Vega 8 are serious competition for counterparts like Intel (INTC, Financial) and Nvidia (NVDA, Financial). It looks like Advanced Micro Devices is going to have a successful 2018. However, there are some concerns about the execution that can impact the company’s strong competitive foundation.
A lack of notebook market impact just yet
The portable PC, or notebook and detachable PC, market is a growing market that is set to dominate the traditional PC market in coming years. IDC noted that the share of portable PCs will increase to around 52% by 2021, translating into a CAGR of about 3% during 2016-2021. Detachable PCs will grow at a CAGR of 11.6% during the forecast period. In contrast, traditional PCs will capture around 22% of total PC market share in 2021. The point is that computing is shifting towards more sleek and portable designs. Consequently, companies targeting portable PCs will potentially be successful in the PCs market.
Advanced Micro Devices, despite having strong line of mobile processors, is lacking a strong portable line up with original equipment manufacturers. As of now, most of the OEMs including Dell and Hewlett Packard only offer one model featuring AMD’s processors.
Source: Advanced Micro Devices
The company can’t gain substantial market share if consumers are not offered several options to select from. Although Lisa Su, the CEO, has said that 60 new platforms will be launched in 2018, the delay in launch can give Intel the process lead. Intel already has eighth-generation coffee lake based notebooks in the market. If Advanced Micro Devices further delays the extensive launch of Ryzen based notebooks, OEMs won’t be thrilled to launch Ryzen based platforms as Intel’s Ice Lake processors are expected to launch by the end of 2018, or early 2019.
The info graphic shows that the company is planning to launch 12nm desktop process, touted 2nd generation Ryzen. However, on the notebook side, the company is planning to launch 14nm based Ryzen chips. Second quarter is going be quite important as this is the window of opportunity for the company to gain market share by expanding its notebook line up with OEMs. As of now, Advanced Micro Devices only has five models with four top OEMs, which is not enough to challenge Intel’s portable PC market share.
Ambiguity around Ryzen’s success
In the fourth quarter results of 2017, the company noted that most of its revenue growth came from higher average selling price; unit sales only increased by 2%. This is a serious concern because Advanced Micro Devices has not been able to boost its unit market share despite the launch of Ryzen. However, the company did manage to sell the same amount of processors at a higher selling price, which is indicative of Ryzen’s competitive strength. However, in order to truly challenge Intel, Advanced Micro Devices has to show growth in unit shipments.
EPYC’s success has yet to appear on financial statements
In servers, the company is making strides by showing design wins, and the company is also winning cloud customers. However, this is not yet translated into revenue growth. During the year ended 2017, enterprise, embedded and semicustom, which includes the revenue from EYPC sales, grew a mere 3% on a year-over-year basis. This should not come as a surprise as server ramps take time while customer test and deploy servers. However, growth should start appearing by the first quarter of 2018 as it has been more than nine months since the launch of EPYC processors.
Final thoughts
Advanced Micro Devices has a strong product line up including Ryzen, Vega and APUs, and a strong product roadmap with 12nm on the way and 7nm to follow. However, the company is struggling in gaining unit market share in Ryzen, along with having a low availability of notebook models. Low unit shipments can hurt the company’s market share ambitions in the long run. On the bright side, it has not been long since Advanced Micro Devices came at par with Intel in terms of technology. It could take some time for OEMs to warm up to the new product offerings. Nonetheless, investors should closely monitor Advanced Micro Devices’ unit shipments in coming quarters along with the growth of enterprise revenue in order to adjust the risk-reward associated with owning this particular stock.
Disclosure: I have no positions in any stocks mentioned and do not plan to initiate any positions within the next 72 hours.
