Can AMD Earnings Catch Up With Intel and NVIDIA?

Advanced Micro Devices (NYSE: AMD  ) will release its quarterly report next Tuesday, and investors sent the stock soaring last year in hopes that the chip company would stage a lasting turnaround. Yet even if AMD earnings can get into the positive column and stay there this year, it still faces the competitive prospects of Intel (NASDAQ: INTC  ) and NVIDIA (NASDAQ: NVDA  ) , both of which are working hard to cement their own positions in the increasingly cutthroat chip sector.

AMD has had a long history of being an also-ran in the semiconductor industry, with its PC chip sales lagging far behind Intel's. It hasn't really played a major role in the mobile revolution, either, letting NVIDIA and other players steal its thunder. But with a new strategy based on more customized solutions, AMD hopes to be able to tap into growth in other ways. Let's take an early look at what's been happening with Advanced Micro Devices over the past quarter and what we're likely to see in its report.


AMD Radeon R9 Series and HD 7990 graphics cards. Source: AMD.

Stats on Advanced Micro Devices

Analyst EPS Estimate

$0.06

Year-Ago EPS

($0.14)

Revenue Estimate

$1.54 billion

Change From Year-Ago Revenue

33%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Could AMD earnings really stay profitable?
In recent months, analysts have gotten a bit more excited about AMD earnings, boosting their full-year 2014 projections by a penny per share. The stock has continued to advance, rising 10% since mid-October.

What's particularly impressive about AMD's share-price performance is that it had to overcome a big drop after its third-quarter earnings report. Even though revenue grew 15%, and earnings per share doubled expectations, investors worried about AMD's expectations that margins would drop by another full percentage point, and that it would continue to lose market share to Intel.

What drove a lot of the enthusiasm about AMD stock was the fact that its placement in the popular Xbox One and PlayStation 4 consoles gave investors hope that the company had found a lasting custom niche that it could dominate. That showed up even in third-quarter results, with revenue from its Graphics and Visual Solutions division nearly doubling from year-ago levels. Given NVIDIA's status in the graphics area, AMD's console wins were especially noteworthy -- and necessary given the pressure on the PC industry.

One big issue AMD faces in 2014 is that Intel and NVIDIA are ready to press their respective competitive advantages to bolster their prospects. For NVIDIA, its newly refreshed graphics processing unit line based on its Maxwell architecture could leave AMD scurrying to catch up. Similarly, Intel has used its manufacturing prowess to build much smaller process nodes than AMD can currently duplicate.

Yet AMD is far from giving up. The company managed to get its graphics processors included in the new line of Mac Pros from Apple, and some analysts believe the move could greatly increase its share of the professional GPU market. Given the value of the high end of that market, further success could make AMD a lasting competitive threat against NVIDIA. In addition, Bitcoin miners have found that AMD graphics hardware performs well with the operations necessary to mine Bitcoin, creating further demand compared to lesser performance from similar NVIDIA products.

For AMD earnings to shine, the company needs to make the most of its gaming console opportunity while the new consoles' popularity lasts, but it also needs to convert on its newfound GPU strength. AMD has the potential to keep rising if it can build on its momentum from last year, but it can't afford to miss what could be the best chance in its history of striking it big.

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  • Report this Comment On January 17, 2014, at 11:43 AM, bluesky64 wrote:

    Dan,

    Thank's for sharing. Here are some of the latest figures to help your model. Your numbers may be low. AMD Video Game Hardware Surged to Highest In Three Years (Bloomberg Bweek)

    Jan 17, 2014: U.S. spending on video-game hardware surged to its highest in three years in December, as consumers snapped up new (AMD based) consoles from Microsoft Corp. (MSFT:US) and Sony Corp. (6758).

    Hardware sales increased 28 percent to $1.37 billion from a year earlier, Port Washington, New York-based NPD Group Inc. said yesterday in an e-mail. The tally, the highest since spending hit $1.84 billion in December 2010, drove total retail sales for the industry to their fifth straight monthly gain.

    Just released on evening of Jan 16 early morning Jan 17, 2014 from Bloomberg Businessweek.

    More updates Future demand my be better.

    Japan Vid Gamers Poll - Over 85% Plan Buying AMD Based PS4

    Jan 17, 2014: One of the biggest and influential vid gaming countries in the world, Japan, had video gamers polled about AMD based Sony PS4 and over 85% plan to either buy immediately or some time after initial release.

    Reported by Kotaku

    Dan Ken Luskin has done some work with daily news and past report and Here is how we see AMD reporting 4q 2013.TOTALS:

    Computing Solutions: Sales of $880 million with $27 million of NET profits

    Graphics and Visual Solutions: ADDITIONAL sales of $308 million

    with $ 66 million ADDITIONAL profits= $ 980 million of sales with $ 145 million of NET profits

    ESTIMATED Q4 SALES: $1.83 Billion ESTIMATED Q4 NET INCOME: $ 119 million NET INCOME PER SHARE: $ .155

    Dan please give and update after earning.

  • Report this Comment On January 17, 2014, at 12:30 PM, KenLuskin wrote:

    AMD EARNINGS ESTIMATES for Q4 2013

    Methodology: Analysis of the sales and profits will be estimated for each business line. AMD had only 2 reporting divisions in Q3, Computing Solutions (CS) and Graphics and Visual Solutions (GVS). But there are 4 separate business lines: Console chips and Discrete GPUs within GVS, PC chips and Server division within CS.

    1) PC chips: In early December the Context research firm reported that for the first 2 months of Q4, EU sales of Laptops with AMD APUs were UP 10% year over year, and that AMD had gained market share to 18% from 14%, while the entire EU laptop market was down 12%. Context also reported that for the first 2 months of Q4, the desktop market as a whole was up 5% year over year. In early January Digitimes reported that TSMC received “pull in orders” related to PC components for late January due low channel inventory. The Digitimes report is a good sign that December PC sales were stronger than expected. Together, these 2 reports echo what other sources have been reporting about the global PC market in Q4= better than the general expectation, and AMD own expectations.

    Based upon the 2 reports of actual PC sales and AMD Laptop sales in Europe, I believe AMD PC chip sales increased about 5% year over year in Q4

    = $33 million increase in sales, with about 10% net profit margins= an $3.3 million increase in profits over Q3.

    2) Server & Server chips: AMD and Verizon announced in early October that new Verizon deployments of AMD’s SeaMicro servers would be only be using AMD Opteron chips rather than Intel server chips. Although Verizon appears to be AMD’s largest individual server customer, VP Lisu Su said AMD could not discuss other AMD server customers deals that are similar to the Verizon deal.

    Total CS sales were $790 million in Q3, with appx. $150 million of that amount accounted for by the Server division, and the remaining $640 million accounted for by the PC division.

    Even though the Verizon deal would indicated an uptick in AMD Server chip sales in Q4, I estimate sales increased about 10% over Q3 = $15 million, with about 15% net profits= a $2 million increase in profits over Q3.

    3) Console chips : It is my understanding that Console chips are being sold at about $100 each. Based upon the $350 million increase in GVS sales from Q2 to Q3, I estimate that AMD sold appx. 3.5 million server chips in Q3. MSFT and Sony have announced total sales of about 7.2 million consoles in Q4, and are still sold out. I estimate that total quarterly sales will be at least 6 million going forward for the first 3 quarters of 2014. Since the Sony and MSFT factories will be producing about 2 million consoles a month, and it takes about 2 weeks for consoles to travel from the factory to the store, there is a need for about 2 million console chips in inventory at MSFT and SONY. Some of the chips that AMD ships are always in the factory, and some are always in transit. Since it takes about 2 weeks of total transit there is always about 1 million ships in consoles that are in transit from the factory to the stores. There are also about 1 million chips that are in transit from AMD to the factories, and in the factories as the consoles are being built and tested.

    Since the total Consoles sold in Q4 was 7.2 million, and appx. 2 million must be somewhere in the factories or logistics at any time, that means the total number of chips required at the end of Q4 was about 9.2 million. Because AMD shipped about 3.5 million chips in Q3, we subtract that amount from the 9.2 million to arrive at 5.7 million chips shipped from AMD in Q4.

    5.7 million console chips shipped in Q4 at $100 = $570 million Since the CFO said that margins at AMD’s packaging and testing plants had improved substantially since Q3, and the foundry yields should have improved after the initial launch, I am estimating that NET profit margin improved from about 15% to 17% in Q4.

    $570 million X 17%= $97 million Since Q3 was about $350 million X 15%= $52.5 million

    Therefore:

    Q4 Console chips sales are about $220 million greater than Q3

    Q4 console chip NET profits are about $ $44 million greater than Q3

    4) Discrete GPUs Discrete GPU is part professional and mostly retail. The largest margins in the professional GPUs , which can be over 70% gross and 30% NET profits. The next largest margins in the high end retail GPUs, which are over 50% gross, and over 20% in NET profits.

    AMD had been growing their share of the professional GPU market throughout 2013, culminating in the shipment of 2 professional semi-custom GPUs for each Apple Mac Pro.

    AMD saw a surge in demand for their high end retail GPUs based upon a new release in early Q4 that produced similar performance as the much higher priced Nvidia GPUs.

    Of the $320 million in Q2 discrete GPU sales, about $15 million was in the form of royalties from Microsoft.

    Professional GPU sales in Q2 were about $50 million, leaving retail discrete GPU sales at about $250 million.

    A)The Apple Mac Pro has 2 discrete cards that would sell for about $750 each. Apple received wholesale semi-custom pricing of about 50% below the equivalent pricing, which means that AMD receives about $750 per Mac Pro sold. Unfortunately Apple did not start production until mid December. With most analysts estimating annual sales of about 1.1 million= about 90,000 Mac Pro produced a month. So, if Apple produced 45,000 Mac Pros, and had inventory for about 1 week of production= AMD salels of chips for about 70,000 units.

    70,000 X $750= $ 52 million of additional sales At 30 % NET profit = $ 15 million additional profit

    B) high end discrete retail GPUs were sold out in November and December

    This is harder for me to calculate accurately. I estimate the high end GPU gaming demand at about 1 million discrete Add in Boards(AIBs) annually, of which Nvidia was selling more than 2/3 prior to Q4. I believe that in Q4 AMD sold about 2/3 of the high end GPUs because of the better value, and the demand from LiteCoin miners.

    A one third increase in market share for AMD equals about 80,000 GPUs per quarter at an average price received by AMD of about $300 (there is a retail markup of about 35%)

    80,000 X $300 = $24 million at a 30% NET profit = $ 8 million additional profit

    C) Remainder of discrete GPU: With Q4 PC sales about 5% better than estimated, I am increasing the remaining discrete GPU sales by 5%= $ 12 million, with net profits of about 20%= a $ 2 million increase in profits over Q3

    Therefore: A + B + C = 88 $ million of additional sales

    A + B+ C = $ 22 million of additional NET profits

    TOTALS: Computing Solutions: Sales of $880 million

    with $27 million of NET profits

    Graphics and Visual Solutions: ADDITIONAL sales of $308 million

    with $ 66 million ADDITIONAL profits= $ 980 million of sales with $ 145 million of NET profits

    ESTIMATED Q4 SALES: $1.83 Billion

    ESTIMATED Q4 NET INCOME: $ 119 million

    NET INCOME PER SHARE: $ .155

  • Report this Comment On January 17, 2014, at 12:30 PM, KenLuskin wrote:

    AMD Q1 GUIDANCE

    PC division:

    Based upon seasonality and AMD’s view of the overall demand for PCs, I expect them to guide sales down 10% from Q4 2013.

    Estimated $715 million Q4 sales will be guided down 10% or about $72 million to:

    $643 million revenues with gross margins of 40%= gross profit of $257 million

    Server division:

    The server division should have similar sales to Q4

    $165 million revenues with gross margins of 50%= gross profit of $82 million

    Console chip division:

    Because of massive pent up demand for the new consoles, I am estimating Q1 consoles sales of 7 million units for the whole quarter compared to 7.2 million consoles sold in the last 5 weeks of Q4 2013. I had previously estimated that AMD produced 5.7 million chips in Q4 which were all used to meet demand, plus the 3.5 million shipped in Q3.

    The extra 2 million is because it takes about 2 weeks for consoles to be shipped from the factory to the stores, the chips that are in transit from the Fab to the factories, and at least a one week supply of chips at the factories. So, there will always be about 2 million chips that are in the pipeline.

    AMD will need to up production to about 7 million consoles chips in Q1 2014 to meet demand in Q1.

    $700 million revenues with gross margins of 25%= gross profit of $175 million

    Discrete Graphic Division:

    Discrete GPU sales are divided between consumer and professional, with professional margins higher than consumer. There are also royalties from the sale of the Xbox 360, and the WiiU.

    Professional GPU sales will benefit from a fully quarter of production of the Mac Pro. With an estimated sales of 1.1 million Mac Pros= 275,000 per quarter. Each Mac Pro has 2 AMD discrete GPUs that are estimated to generate revenues of $750 per Mac pro unit sold.

    275,000 X $ 750= $206 million plus another $50 million of other professional sales=

    $256 million revenues with gross margins of 50%= gross profit of $128 million

    Consumer GPU sales will benefit of a full quarter of demand for AMD’s high end GPUs, which were sold out in Q4. Also AMD won a majority of the design wins for laptops that will be introduced in Q1. The discrete consumer GPU market is about $700 million in Q1.

    Since AMD will have at least 50% of this market= $350 million

    $350 million revenues with gross margins of 45%= gross profit of $157 million

    Royalties in Q1 will benefit from the Christmas sales in Q4. Royalties are tallied each quarter based upon total sales of the Xbox 360 and the WiiU, but they are not received by AMD until the following quarter. It is estimated that AMD receives about $10 for every unit sold.

    It is estimated that Xbox 360 sold about 3 million units in Q4 2013, while the WiiU sold about 2 million units. 5 million X $10 = $ 50 million

    $50 million revenues with 100% gross margins= gross profit of $ 50 million

    TOTALS for REVENUES TOTALS for GROSS PROFITS

    PC: $643 million $257 million

    Server: $165 million $82 million

    Console: $700 million $182 million

    Pro GPU: $256 million $128 million

    Consumer GPU: $350 million $157 million

    Royalties: $50 million $50 million

    TOTAL REVENUES: $2.16 Billion TOTAL Gross Profit: $856 Million

    Gross profit MARGIN: 39.5%

    With Operating expense of about $450 million, NET PROFITS= $406 million

    Less interest and taxes of $50 million= $356 million

    Divided by 765 million share= $.46 EPS

    AMD’s OFFICIAL GUIDANCE: AMD will be overly conservative in their guidance, so they can surprise to the upside.

    AMD’s guidance is usually a % of the last quarter, with an estimated gross profit, and an estimated operating expense.

    My estimated revenue of $2.16billion is up from my estimated $1.83 billion in Q4

    = 18% Increase.

    AMD OFFICIAL Revenue guidance will probably be for up 5%, similar to what they forecast for Q4.

    AMD OFFICIAL Gross profit guidance will also be conservative, and will be for about 37% gross profit

    AMD OFFICIAL Operating Expense will be probably be for about the same $450 million target of Q4.

  • Report this Comment On January 17, 2014, at 12:31 PM, KenLuskin wrote:

    AMD analysis 2014 to 2017

    Console division

    1) Naysayers are being proven wrong as demand for game consoles is powerful: People LOVE to play AAA video games. There is an entire generation of children that LOVE to play mobile games on the smart phones their "hovering" parents by to keep tabs on them. Most of these "kids" will want Consoles and/or PCs to play AAA games. AAA games are much more immersive than cheapo mobile games. Console and PC graphics are TEN times more powerful than hand held.

    2) Estimating annual sales: People who bought 100 million Nitendo Wii over a few year period, are now going to buy either the Xbox 1 or PS4. AMD has a GPU in the WiiU so any sales still help AMD. From 2006 through 2012 there were about 260 million consoles sold. About 80 million each for Xbox 360 and PS3, with about 100 million Wiis 2013 is the transition year, so it is not fair to count. Xbox1 and PS4 are not able to meet demand.

    3) 260 million total consoles sold over a 7 year period = an average of 37 million per year. The peak console sale year was in the 3rd year after launch. When over 40 million a year were being sold. During this entire period consoles were banned in CHINA, the most populous country on earth, over 4 times the population in the US.

    4) AMD agrees with IDC number of 40 million consoles being sold in 2014, with ALL of them except the PS3 bringing either royalties or sales and profits to AMD. It is highly doubtful that PS3 will sell more than what they sold on 2013= 10 million, which means AMD will EARN profits on at LEAST 30 million consoles in 2014.

    CHINA is the wild card that could push the MINIMUM 30 MILLION number UP dramatically.

    5) But, until sales actually start in CHINA a very conservative estimate of AMD chips or royalties will be on at LEAST 30 million units.

    6) Yield and therefore profits are at the LOWEST in the first quarter of a ramp. Therefore AMD will see increasing profitability on the new console APUs.

    7) Since AMD did NOT argue with a 20% NET profit, (NOT gross but NET) for console chips in 2014 the calculation is easy. 30 million X $100= 3 billion X 20%= $600 million

    8) Therefore AMD will earn a NET profit of at least $600 million from the console sales and royalties in 2014. Of course the sales figure could be slightly lower, because AMD only gets royalties on the sale of the Xbox 360.

    9) I firmly believe that if CHINA govt. goes back on their PROMISE to allow Console sales their will be mass riots. Therefore, for 2015 I am including an estimate of console sales in China.

    10) There are about 1.4 billion people in China. The top 20% have incomes that are similar to the average American. Therefore, there are about 280 million Chinese that have the ability to purchase a Console for their whole family. The sales of about 24 million $750 NON subsidized iPhones in China in 2013, proves that their substantial purchasing power. Analysts are estimating that now that the largest mobile carrier will offer the iPhone in 2014, total sales will increase to at least 40 million NON subsidized $700 iPhones.

    11) If only half of the people who can buy an iPhone for their own personal use decided to purchase a game console for their household, that equals about 20 million consoles. US consoles sales are about half of the world total. So, since the Chinese market of the top 20% = the US, it makes sense that there would be at least an equal amount of consoles sold. The sales in 2015 could be dramatically higher since there is huge pent up demand because of the 14 year ban on sales.

    12) By 2015 Sony will probably NOT be selling the PS3, which means that ALL console sales will generate sales and profits/royalties for AMD.

    13) Using 40 million for NON China plus at least 20 million console sold in China= 60 MILLION total

    14) 60 million X $90= $5.4 billion X 20% = $ 1.08 BILLION NET profits in 2015

    Discrete GPU division

    1) There is more than a HALO effect from AMD's dominance of the Console chip business, there is a SOFTWARE driven advantage to AMD from the OPTIMIZATION provided by ALL developers of AAA games. AAA game developers create almost ALL their games for the Consoles first and then PORT them over for PCs.

    2) Developers like that every Console is the same, whereas there are so many different PC configurations owned by people. Therefore, most ALL games are OPTIMIZED for the console architecture, and then ported over to PCs later.

    3) BOTH the Xbox1 and PS4 have APIs that are similar to the MANTLE API that AMD created for PCs. These APIs allow developers to send code directly to GPU portion of the AMD APU, rather than thru the CPU first.

    4) Since the CPU is running at about 4GHz and the GPU is running at about 1GHz, the CPU is frequently "waiting" on the GPU. Sending instructions directly to the GPU is much more efficient, and reduces the demands upon the CPU. In the OXIDE demo shown on Youtube, using the AMD MANTLE API allowed the CPU to be "DOWN CLOCKED" from 4 GHz to 2GHz, withOUT any degradation.

    5) This info was shown to PC Laptop OEMs, and the result is that AMD has enough DESIGN WINS for 2014 to take at least 50% discrete GPU market share. This info was presented by AMD's VP sales at the Raymond James conference on Dec. 10 2013.

    6) In 2014 consumer gamers who buy discrete GPU add in boards (AIBs), will come to understand what the PC laptop OEMs already know concerning the advantages of AMDs' discrete GPUs because of the MANTLE API and the OPTIMIZATION of ALL AAA games for AMD GPUs.

    7) Therefore, even if the demand from Litecoin miners falls off, consumer gamers will be greatly favoring AMD discrete GPU add in boards in 2014.

    8) Additionally, when consumer gamers learn that PCs with AMD GPUs outperform PCs with Nvidia GPUs, sales will be greatly skewed toward AMD!!!!

    9) The consumer discrete GPU market is about $3 billion annually.

    10) Gross margin at the high end are extremely high, well over 50%.

    11) The performance advantage that AMD GPUs have allowed them to gain more than 50% of the Laptop design wins without severe discounting. Therefore AMD will receive at least $1.5 billion in revenues from sales of discrete consumer GPUs in 2014. With a gross margin of about 50%= $750 million of gross profit in 2014

    12) The professional discrete GPU market has even HIGHER Gross margins than the high end consumer GPU market.

    13) The new Apple MAC Pro is now a Work station, rather than a high end PC. With 2 AMD semi-custom GPUs in each MAC Pro, AMD's share of the professional GPU market will skyrocket. Analysts estimate that Apple will sell over 1 Million MAC Pros in 2014.

    14) With tear downs estimating the replacement value of the 2 GPUs in the MAC Pro at appx. $1,200 in the entry model, AMD will be receiving at least $500 per every MAC Pro sold. = $500 million in 2014 revenues. With gross margins of at least 50%= $250 million of gross profit in 2014

    15) TOTAL Gross profit from discrete GPUs in 2014 will be about $1 billion.

    16) AMD was breaking even in Q2 on about $300 million of discrete sales at 50% gross margin, which means all expenses were about $150 million for the discrete GPU business= ~ $600 million annually

    17) Subtracting $600 million of expenses from $1 billion of gross profits= $400 million of NET profits from Discrete GPU sales in 2014.

    18) 2015 should be similar to 2014 for discrete graphics.

    Server division

    1) Industry analysts estimate the SERVER chip industry total of about $11 billion in 2013, growing to about $15 billion in 2017.

    2) Since AMD only had about 4.5% market share of the sever chip business in 2013= $500 million revenues in 2013. The SeaMicro server business (NON chip) probably had about $100 million of revenues in 2013 bringing the total to about $600 million. The Server chip and SeaMicro business are part of the reporting division called Computing solutions (CS).

    3) [High-density architectures in the data center are gaining popularity in large part because the data center itself is changing – from the enterprise-based entity of yesterday to the cloud-facing architectures of tomorrow.]

    [Micro servers are an emerging form factor of servers designed to process low intensive workloads like lightweight web serving; simple content delivery nodes and low end dedicated hosting. They are basically low power servers consisting of several nodes that share a common architecture. Increasing demand for servers in data center due to the explosive growth of data usage among customers and the power usage of the traditional servers even when they are in idle mode makes them ineffective cost-wise. However the stringent requirement of maintaining 99.99% uptime of the websites or data availability makes these costs necessary. Micro servers were developed as a cost effective solution to this dilemma faced by servers industry. This have an extraordinary dense and power saving design in which fans and power supply are shared by tens or potentially, hundreds of server nodes. This efficiency leads to the elimination of space and power consumption of redundant components. It presently costs up to 63 percent less than the conventional servers.

    SeaMicro is the pioneer in using low power server chips that are strung tightly together using its proprietary Freedom Fabric. Lower power chips reduce electricity costs, both for processing and cooling.

    4) Cloud computing application will grow at a phenomenal CAGR of 62.3% from 2013 to 2018.

    5) AMD's SeaMicro and the creating of an ARM 64 bit Sever chip are directed directly at the 62.3% growth in demand from Cloud computing.

    6) AMD believes they will have 20% to 25% of the server chip market by 2017. Since the largest part of the estimated growth for server chips will come from Cloud computing AMD's market share could be even larger than their PUBLICLY announced target.

    7) The huge growth in AMD's Server division will start in Q3 2014 when AMD's ARM 64 bit chips are in full production.

    8) 20% of the $15 billion server chip market in 2017= $3 billion Server chips will become increasing larger % of the total cost of a server, as servers become increasingly dense, and rely upon SoC chips and Fabrics rather than large numbers of cheap individual servers.

    9) Sales of the SeaMicro servers are on top of the server chip market. [ IC Insights forecasts that worldwide microserver sales will grow 139 percent in 2014 to $580 million from an estimated $243 million in 2013. Between 2012 and 2017, microserver sales are projected to rise nearly 72 percent per year on average to total $1.2 billion in 2017.]

    “The companies that make servers feel that they had it good when they had a choice, and they’re eager to have one again.”

    11) Re/Code: [ The main reason that ARM chips dominate the mobile phone business is that they’re designed to consume power efficiently in order to preserve battery life. That same power-sipping capability is what makes ARM chips attractive for servers. As data centers operated by companies like Google, Facebook, Amazon and many others pack thousands of machines into ever more dense spaces, the cost of power to keep them running has quickly risen to the top of the list of things those companies worry about. Add to that Intel’s ability to charge relatively high prices for Xeon chips, and the potential appeal only grows.

    12) Re/Code: The one thing that ARM chips have lacked until recently is a 64-bit core design. Without that, the chips can’t work with the amount of memory typically required in a server. Intel and AMD chips have had 64-bit chips for about a decade. ARM didn’t release its first 64-bit design until 2011, and the first one to wind up in a smartphone was Apple’s A7, in the latest iPhones and iPads.

    13) While Samsung and Qualcomm are both powerhouses in the design of chips for phones, neither has ever built a general-purpose microprocessor. AMD, which has a long history of building x86 chips for PCs and servers, has that expertise.

    “If AMD were to take out the relevant ARM licenses, it could potentially be a very potent force,” Moorhead said. “AMD knows how to build processors, and it has the respect of HP and Dell and all the other vendors.”

    14) From the comments from AMD about VERIZON being the first of the data center deals they can discuss, to the constant hints from AMD server chief Andrew Feldman about Amazon, Facebook , Baidu, it is highly likely that AMD already has built in customers for the ARM 64 bit sever chips, that will be used in SeaMicro servers, or in the custom servers being built at the large cloud providers.

    15) Based upon the DEMAND for lower power server chips, and the DEMAND for an alternative to Intel from the large Cloud providers, it is highly likely that AMD will have success in increasing market share in the Server chip space.

    16) A straight line increase from a $600 million run rate for AMDs' server division to $3.5 billion in 2017 would imply an increase to about $1.5 billion in sales in 2015 and $2.5 billion in 2016.

    17) Since AMD will be primarily be competing against Intel's huge profit margins in the server chip space, I believe they will be able to earn 50% gross margins.

    18) Therefore, I am factoring in a $200 million increase in AMD's server division in the 2nd half of 2014 with 50% gross margins.

    19) Wall st will be relatively skeptical of AMD's server growth until the CLOUD deals with Amazon, Facebook, Baidu, etc are made public.

    CONCLUSION: AMD's server division will have tremendous growth starting in Q3 2014, with NET profits growing from $100 million a quarter to annual rate of $ ONE BILLION in 2015, $1.5 billion in 2016, and $2 billion in 2017.

    The HUGE growth in Cloud computing, and Semi-custom deals with the largest Cloud players, will result in AMD's PE exploding to mirror the Cloud industry.

    PC division

    1) AMD's PC divison is part of the reporting segment called Computing Solutions (CS), which had a total of $790 million in Q3 sales. Since CS also houses the server division, with estimated Q3 sales of about $150 million, the PC chip division sales for Q3 were about $640 million.

    2) AMD's strategy for the PC chip division has been to emphasize their GRAPHIC superiority by focusing on APUs, rather than CPU only chips. AMD is trying to carve out a powerful and growing niche that empowers devices with better graphics than their competitor at a lower price. While AMD had some success with Laptop chips in 2013, they will be emphasizing Desktop chips in 2014. This is a brilliant strategy to emphasize GPU intensive functions that will set AMD powered machines apart from their competitors.

    3) While AMD is NOT relying upon the PC division for growth, the entire category will be about 300 million units in 2014, and PC OEMs want to support AMD as an offset to being totally reliant upon Intel.

    4) For NON technical functions, current generation CPUs are more than fast and powerful enough for most people. But, what most people desire is more GRAPHICAL abilities. AMD will continue increasing the GPU power of its APUs in 2014 and 2015.

    5) People are increasingly interested in using high powered GRAPHICAL power for all kinds of applications, with AAA video gaming at the top of the list.

    6) AMD will maintain its overall market share in PCs by emphasizing the superior AAA gaming experience from AMD PCs. The MANTLE API reduces the need for a super powerful Intel CPU, which will tip the balance towards AMD.

    7) AMD will use its PC division innovations in producing more powerful APUs to create semi-custom chip deals for various industrial applications, from Casino gambling equipment, industrial automation, medical imaging, aerospace and automotive.

    8) AMD has been able to successfully reduce operating expenses in the PC division, such that the entire CS reporting division reported a $22 million profit, even though revenues fell by 6% from the previous quarter.

    9) AMD's top of the line APUs have equal GRAHICS to an Intel Integrated Graphic chip that costs more than 4 times as much. AMD will use the fact that ALL new AAA games are optimized for AMD graphics to increase their share of the entry level consumer desk top market.

    10) AMD will let Intel damage itself doing battle with low power ARM chips in the tablet space, while AMD focuses on semi-custom deals that require AMD's GRAPHICAL abilities in a low power APU.

    CONCLUSION: AMD may be able to produce profits in the PC division by focusing upon their domination of the AAA gaming space. That said, I will simply forecast that the PC division will have flat to slightly lower sales and break even in both 2014 and 2015.

    1) CONSOLES: 2014 sales $3 BILLION NET profits $600 million

    2015 sales $5.4 BILLION NET profits $1.08 Billion

    2016 sales $5.4 BILLION NET profits $1.08 Billion

    2017 sales $4.8 BILLION NET profits of $ 960 million

    2) DISCRETE GPUs

    2014 sales $2 BILLION NET profits $400 million

    2015 sales $2 BILLION NET profits $400 million

    2016 sales $ 2 BILLION NET profits $400 million

    2017 sales $ 2 BILLION NET profits $400 million

    3) SERVER division

    2014 sales $850 MILLION NET profits $200 million

    2015 sales $ 1.5 BILLION NET profits $500 million

    2016 sales $2.5 BILLION NET profits $800 million

    2017 sales $3.5 BILLION NET profits $1 BILLION

    4) PC Divison 2014 sales $2.5 Billion NET profits ZERO

    2015 sales $2.25 Billion NET profits ZERO

    2016 sales $2 BILLION NET profits ZERO

    2017 sales $2 BILLION NET profits ZERO

    TOTAL: 2014 sales $ 8.35 BILLION NET profits $1.2 BILLION

    2015 sales $ 11.15 BILLION NET profits $ 2 BILLION

    2016 sales $ 11.9 BILLION NET profits $ 2.3 BILLION

    2017 sales $ 12.3 BILLION NET profits $ 2.4 BILLION

    DEBT REDUCTION will eliminate net interest costs after 2015

    Additional SEMI CUSTOM design wins will create additional revenues and profits NOT included!!!

  • Report this Comment On January 17, 2014, at 12:32 PM, KenLuskin wrote:

    Global Game Console prospects 2014 to 2017

    1) Consolidation In 2013 the game console industry consolidated from 3 major competitors to just 2. While Nintendo will take exception to this depiction, their sales are now simply too low to support them as a serious contender. The cost of developing game console hardware and selling it for a loss, favors conglomerates Sony and Microsoft over any other future competitors.

    I am NOT counting the future launch of the Occulus Rift as a console, because it is a virtual reality goggle and NOT a full console. The Occulus Rift must be plugged into a PC or console in order to function.

    Game consoles have become increasingly powerful to the point that it is doubtful that any company besides the 2 entrenched competitors has the resources to absorb the large losses required to launch a competing proprietary system.

    Virtually all the AAA games are OPTIMIZED for either or both of the 2 major consoles.

    This means that games look best on a large screen TV while using either the PS4 or Xbox1. The AAA games are then ported over for use on a PC. PC gaming is NOT meant to used on a widescreen TV. PC gaming canNOT be enjoyed by a family or group of friends while relaxing on a couch.

    2) Reasons for Consolidation The initial demand for the new consoles from Sony and Microsoft was significantly larger than any prior launch. Since Nintendo has very few third party game developers, and sales of their new console the WiiU are a small percentage of those from Sony and MSFT, it is doubtful they will be able to compete.

    Virtually ALL third party developed AAA games are being optimized for either or both of the new consoles. When ALL the software is being developed for only 2 platforms, this makes it virtually impossible for any other console platform to compete.

    What drives the sale of any hardware is the ecosystem of software or content. The large amount of OPTIMIZED content that is being created for the PS4 and the Xbox1 guarantees their success.

    This chart from Statista shows the total sales of all Consoles has dropped from 2008 to 2012, but the sales of the PS3 and Xbox360 have been relatively stable during this period. Sales in 2012 were similar to 2008 even though they were in their 7th year of the SAME model.

    The largest decline in sales is from casual gamers using smart phones and Tablets, rather than Nintendo devices, and handheld Sony consoles.

    3) Result of Consolidation

    People who desire to play AAA games on a large TV screen, from the comfort of their couch, and with friends or family, are opting for either the new Sony PS4 or the Xbox1, to the exclusion of the Nintendo WiiU or handheld consoles from Sony. Demand so far exceeded supply at launch, that I estimate only half of the initial demand has been met.

    Demand can be explained because these new consoles from MSFT and Sony are the first in 8 years, in addition to almost all new content being created for these platforms.

    Even though there is more content for the new consoles than from the prior launch 8 years ago, there are still only a few popular titles, which is why the huge demand has surprised the pundits.

    As the amount of content for these new consoles builds, the demand will grow as the bulk of gamers decide to switch from their old consoles to the new ones.

    4) Background info on gaming Consoles

    Through the end of 2013, there have been a total of about 170 million PS3 and Xbox 360 consoles sold, spread roughly evenly between the two.

    From viewing the chart of console sales in this article in Business Insider, it is apparent that the combined sales of the Xbox 360 and PS3 is bigger than any other single console model.

    Because AMD has a similar processor powering both the Xbox1 and PS4, the combined sales are extremely important, although it does NOT really matter how the sales are split.

    Sony wanted to increase its market share in the large US market, so they launched a week earlier than MSFT. Both companies have indicated since their launches that they canNOT meet demand. In other words, both companies are selling their consoles as fast they can build them.

    Sony has reported selling 4.2 million consoles through the end of 2013, while MSFT reported selling over 3 million.

    Since the PS4 had been on sale for about 5 weeks = 840, 000 a week. The Xbox1 had been on sale for about 4 weeks= 750,000 a week.

    What is most interesting is that PS3 outsold the Xbox360 in Japan 6 to 1.

    Sony has such strong GLOBAL demand, and had such a strong home field advantage, that they chose to not launch the PS4 in Japan until Feb. 22, 2014 This delay is ostensibly so that Sony can partially satisfy demand in the US, Europe and other markets, and rebuild inventory before the launch in Japan.

    In the last 5 years China and India, which together account for 2.6 billion people out of the world’s 7 billion have greatly increased the size of their economies, which means a combined 100 million MORE people now have the earnings power to purchase a game console.

    China had a BAN on game Consoles since 2000 up until last week.... So pent up demand in China is beyond comprehension. This BAN on consoles in China has resulted in robust PC gaming industry, which grew 38% in 2013.

    PC gaming is completely different from Console gaming! Console games are played on a TV screen, and can be enjoyed by an entire family, or group of friends. Therefore, those people who suggest that the Chinese market for game consoles will not be similar to that in the US, Europe, and Japan, are badly misinformed.

    Everything seems to change faster, including the iterations of present devices. Even though 2014 is the 9 th year of the PS3 and Xbox360, the new consoles will probably have a life of only 4 to 6 years.

    5) General factors for estimating future demand

    Here are the key reasons that pundits are greatly UNDERestimating demand of the combined sales of the Xbox 1 and PS4 over the next 4 years.

    A) Consolidation of consoles to just PS4 and Xbox1 will result in greater sales of these 2 consoles versus the greater choice offered by 3 or more competitors.

    B) PS4 are Xbox 1 are first updates in 8 years.

    C) China lifting the console BAN will result in sales commensurate with the purchasing power demand expectations that the $700 NON subsidized iPhone will sell 40 million units in 2014.

    D) 20 NEW games for the NEW consoles will be announced over the next 9 months, which will stimulate the 170 million prior console owners to switch to the NEW consoles.

    E) Over the last 5 years a generation of children has grown up playing video games on the mobile phones that their hovering “helicopter” parents have bought for them.

    AAA games are 10 times as powerful and incredibly more immersive. Pundits do NOT understand that mobile games are to miniature Golf, as real Golf is to AAA gaming: Kids grow up from playing miniature Golf, and GRADUATE to playing real Golf.

    The validation of the future sales of the Xbox1 and PS4 is the initial launch that is 5 TIMES that of the prior model’s launch.

    6) Metrics of future demand

    Without taking into account China and other emerging economies, the consolidation of demand from Nintendo users and the replacement of the old consoles over the next 4 years will at least equal the 170 million older models.

    170 million consoles replaced over the next 4 years = 42.5 million NEW consoles sold per year on average.

    Factoring in the demand from China and growth in emerging economies, plus the new generation of kids addicted to video games, means sales should swell to 60 million or more per year.

    7) Per year estimates

    From the past cycles, sales did NOT peak until the third year after the initial launch.

    One of the main reasons for this observation is related to the fact that the new models are not backwards compatible. This means that the new models have much less content available until the 2nd or third year after launch. The bulk of people tend to make the switch to the new consoles after there is as much content available as exists for the old consoles.

    Also, after the 2nd year, the old consoles are generally discontinued, which greatly accelerates the switch, because there is practically no new content produced for the old consoles.

    IDC and AMD were estimating total consoles sales in 2014 of about 40 million, but this was BEFORE China announced the elimination of their BAN.

    Based upon the estimated sales of about 40 million NON subsidized $700 iPhones in China during 2014, there will be console sales of at least 10 million.

    2014: 50 million total console sales with only about 5 million being PS3 and about the same for the Xbox 360. Which means that new consoles will sell about 40 million AMD earns royalties on the Xbox360 and the Nintendo WiiU. Therefore, AMD will earn profits on about 45 million consoles sold.

    2015: 55 million Total consoles sold with NO sales of the PS3. Therefore, AMD willl earn profits on all 55 million consoles sold

    2016: 60 million Total consoles sold, with AMD earning profits on ALL 60 million sold.

    2017: 55 million Total consoles sold, with AMD earning profits on all 55 million sold.

    8) Per quarter sales expectations for 2014

    In NON launch years when supply is NOT constrained, the Christmas demand during Q4 increases sales so that they are about equal to the first 3 quarters combined.

    The Xbox1 was only launched in 13 territories out of a total of over 50. MSFT will expand the number to all areas during the first half of 2014.

    As of December 13th the PS4 was expanded to 48 markets, while the Xbox1 was still only in 13 markets.

    It is not clear why Sony expanded to 48 markets, when they could not meet demand in the initial launch markets.

    One of the reasons may revolve around the Xbox1’s voice recognition system, which must be tuned to the language and dialects in each market.

    Looking at the PS4, the launch in Japan on Feb. 22 will generate a commensurate level of sales relative to total PS3 sales, as the launch elsewhere. PS3 sales in Japan were about 12% of total Global sales. Therefore, sales in Japan during the launch from Feb. 22 to March 30 will be at least 500,000 units.

    There was initial estimated demand in the US alone for at least 2 million more PS4s than Sony could deliver in Q4. Reports out of Europe were of a similar amount of units in demand that could not be met by Sony.

    So, based upon the expansion of the launch near the end of the Q4, the unfilled demand in the US and Europe, and the initial launch in Japan on Feb. 22, I estimate that Sony will sell at least 4 million units in Q1 2014.

    Now, looking at Xbox1, as MSFT expands the number of markets from 13 to over 50 during Q1 2014, they will more than make up for slower per week sales in Q1 in the US and Europe. Therefore, I estimate that MSFT will be able to sell at least 3 million Xbox1s during the 13 weeks of Q1, versus the 3 million they sold during 4 weeks in Q4 2013 in only 13 markets.

    Therefore, TOTAL Xbox 1 and PS4 sales will be at least 7 million units in Q1 2014.

    * Q2 consoles sales will start to benefit from sales in China!

    * Q2 console sales will start to benefit from half of the 20 new games being launched.

    Therefore, Total Xbox1 and PS4 sales will be stay at 7 million units in Q2.

    Additional launch of 10 more games in Q3 will keep demand at 7 million units.

    Following the console rule of thumb for Q4 (first 3 quarters equals Q4) means 7+7+7= 21 million

    Therefore, PS4 and Xbox1 consoles sold in Q4 will be about 21 million***

    *** In order to meet the massive demand in Q4 Sony and MSFT must stock units in Q3. This means AMD must increase console chip production in Q3. AMD must not only meet Q3 current demand of 7 million units, they also must produce about half of the total sales for Q4.

    Therefore, AMD must produce half of 21 million= 10 million + 7 million = 17 million chips in Q3

    In Q4 AMD chip production should drop back down to about 10 million.

  • Report this Comment On January 17, 2014, at 12:33 PM, KenLuskin wrote:

    ALL of the above reports are by Ken Luskin

    They are available for download and viewing on SCRIBD

    FOR FREE!!

  • Report this Comment On January 17, 2014, at 12:38 PM, bluesky64 wrote:

    Thanks Ken

    I hope you update after earnings.

    I have side bets your EPS are low by 1 cent.

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