Does Advanced Micro Devices Really Have an $80 Billion Opportunity?

At Advanced Micro Devices' (NYSE: AMD  ) Core Innovation Update, the company gave a whole lot of information about its plans extending a few years out. Most of this information was good stuff and certainly helpful in trying to evaluate the company's potential competitive positioning going forward, but there was one slide in particular that needs to be dug into a little bit.

AMD is claiming an $80 billion total addressable market
The following slide reveals, in broad strokes, why AMD is pursuing its "ambidextrous" strategy of developing both ARM Holdings (NASDAQ: ARMH  ) -based products and X86-64 products.

Source: AMD.

While it's not worth getting into an argument over the numbers for the far distant future here, especially as anybody can predict whatever trend one would like, the bigger issue here is in the historical and nearer-term growth numbers. The slide overall has a number of problems that are worth digging more deeply into.

The total addressable market is a bit misleading
At ARM's own analyst day, it gave the following helpful slide presenting its estimated total addressable market, or TAM, during 2013 and where it expects those TAMs, by segment, to be by 2018 -- which probably, not coincidentally, explains AMD's numbers.

Source: ARM Holdings.

ARM says its TAM is about $40 billion today, and the company expects that that figure to grow to $60 billion by 2018. AMD seems to be mirroring these projections, but these numbers overinflate AMD's "opportunity" in the following ways.

  • AMD is unlikely to play in smartphones. Since AMD is missing a number of critical intellectual properties (image signal processor, cellular modem, connectivity, RF), it is unlikely that it will be a major player in the smartphone market. This means that only the non-Apple, non-Samsung tablet market is open to AMD, and even then this is a market dominated by Qualcomm, Intel (NASDAQ: INTC  ) , Rockchip, MediaTek, Allwinner, and so on.
  • Enterprise infrastructure has many players, including Intel. In the data center and cloud, Intel is the big kahuna by revenue and has handily defeated multiple generations of AMD-designed processors. Further, in the enterprise networking and infrastructure space, AMD will compete not only with Intel (which is actually a fairly new entrant in this space, and probably not counted in AMD's X86 TAM numbers), but also with Broadcom, Freescale Semiconductor, Cavium, and many others. The TAM may be "large," but it's a pie split many ways among many stronger and more experienced competitors.
  • Embedded intelligence doesn't sound like a big AMD market. While there are parts of the embedded-intelligence market that AMD can address (and that Intel is addressing with X86), ARM is including tiny Cortex M-based micro-controllers -- and similar products from many other vendors -- in this TAM. This is not a market where AMD is going to play heavily, once again overstating AMD's TAM.

While AMD is presenting this large $80 billion TAM that it could someday grab a big piece of, the fact is that outside PCs and server processors, which Intel dominates, and mobile applications processors, which Qualcomm and MediaTek dominate, there isn't really as much left to grab as the presentation would like investors to think.

Can AMD still grow?
The bottom line that matters to investors is whether AMD can still grow. While I'm not too optimistic about the company's chances in the PC over the next few years (flat to down TAM; share loss to Intel), the company is still poised to do well with semi-custom jobs, higher-performance embedded products with both ARM and X86, and perhaps its dense server parts, although this space will be extremely competitive.

However, the notion that an $80 billion TAM is open to AMD with so much of that revenue held captive by a couple of very large players seems a bit too optimistic. There is room for AMD to grow if it executes across these initiatives well -- and this is probably the biggest open question -- but the ceiling to that growth is probably far lower than the combined TAM of the ARM and X86 markets taken a whole.

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Read/Post Comments (14) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2014, at 12:50 AM, rav55 wrote:

    @Ashraf

    Intel is justifying spending $BILLIONS to make $MILLIONS using the very same argument. The Tablet market is 200,000,000 units.

    And you hit on that like a trout on a fly.

    Rory Read has already publicly announced that Samrtphones were not on the table. So that is 33% of your point invalidated.

    "Enterprise infrastructure has many players, including Intel."

    Intel does not compete in the ARM server market. And they maybe the BIG KAHUNA but that means they have no place to go but down.

    Intel server silicon is overpriced and energy inefficient COMPARED to ARM-64.

    Your negative expectations not-withstanding, Intel has demonstrated a preternatural inability to fab cheap chips. That's why Intel SPENDS $BILLIONS to make $MILLIONS.

    The big question is will Intel lower margins in the server space to stay competitve?

    Also the very real danger to Intel is if it losses ANY noticeable market share the stock will tank. Intel is very vulnerable right now. If the pc market doesn't bounce back they may be forced to close the Communications and Mobile Group just to return the company to value.

    "Embedded intelligence doesn't sound like a big AMD market." Is this a fact or your biased opinion?

    An investment in AMD has a better chance to achieve growth while an investment in Intel has a very good chance to continue to move sideways or decrease unless of course CM Group is shut down or rebates stop and Intel competes in the Tablet market without dumpoing silicon.

    Lossing Warren Buffet and ending dividends ended any reasonbale expectation of value.

    So do us ALL a favor Ashraf.

    Stop writing about AMD unitl you start calling Intel to task for spending $BILLIONS to make $MILLIONS. When you do this then you will have gained some integrity/

  • Report this Comment On May 27, 2014, at 1:32 AM, ToxyFool wrote:

    Completely agree with the above poster. Intel's only tactic in this brave new world is to rely on it's rapidly-shrinking process advantage, and that isn't ever going to change the inherent inefficiencies of the X86 ISA. Why don't you talk a bit about that as well, Ashraf?

  • Report this Comment On May 27, 2014, at 4:25 AM, TMFAeassa wrote:

    @ rav55

    Spending billions to make millions...sounds like what AMD did when it purchased ATI ;-)

  • Report this Comment On May 27, 2014, at 8:22 AM, CHADBOGA wrote:

    @ToxyFool,

    The "inherent inefficiencies of the x86 ISA" are grossly overstated and a non-factor going forward.

    The "inherent inefficiencies of the x86 ISA" was why RISC & the POWER PC architecture were going to put Intel to the sword, back in the day.

    Funny how that turned out for POWER PC and all the other then dominant RISC architectures.

  • Report this Comment On May 27, 2014, at 11:16 AM, H2323 wrote:

    You put Intel in there as a company that dominates in tablets.....ROFL...okay Ash. Go outside..get a job..this is getting old man.

  • Report this Comment On May 27, 2014, at 12:54 PM, TMFAeassa wrote:

    H2323,

    If Intel hits its 40 million+ tablet goal, it will have between 15-20% of the tablet market. I'd say that's a pretty major player, wouldn't you?

    Thanks for the comment and Fool on!

    --AE

  • Report this Comment On May 27, 2014, at 3:58 PM, rav55 wrote:

    @TMFAeassa

    Hmmm.... hyperbole notwithstanding, your point is specious.

    Yes they spent 5 billion. And AMD is NOW a profitable growing company. Without the ATI acquisition they likely would not be here right now.

    Intel would also be selling siliocn with 50% margins. And screwing the consumer everytime the could

    So your point is?

  • Report this Comment On May 27, 2014, at 4:05 PM, rav55 wrote:

    @TMFAeassa

    "If Intel hits its 40 million+ tablet goal, it will have between 15-20% of the tablet market. I'd say that's a pretty major player, wouldn't you? "

    ANd therein lies the rub. Intel HAS NOT sold 40 million units so that means they ARE NOT a major player.

    And if Intle does sell 40 million units at a loss then you can expect better than $4 BILLION in rebate losses this year.

    Forget about ANY Intel dividend.

    Forget about shareholder value.

    Intel stock will drop faster than a tarts knickers at a Secret Service convention.

  • Report this Comment On May 27, 2014, at 4:59 PM, ta152h wrote:

    Did you actually say Intel is a dominant part of the tablet market? Did you, really?

    Thanks for the chuckle. In fact, Intel has failed to the extent they have to bribe people to use their inferior parts.

    Everyone knows they are failing in tablets. By paying people to use their products, you now have the truth as clear as anything anyone can say. Even then, they are failing.

    Even so, most of what you are saying is correct. But, AMD shouldn't have so much trouble with Intel is servers, once they move to ARM. Intel will be suffering with an obsolete, inefficient, limiting instruction set, while AMD will finally be working with an efficient one. And with Samsung investing far more in manufacturing technology than Intel, and sharing it, it's likely Intel will lose much, if not all, of it's manufacturing edge moving forward. Based on the roadmaps, that seems quite clear, but roadmaps don't always come true, so there's definitely some uncertainty there.

    I'd like to see AMD spend a bit more and use POWER as well, since it buries anything Intel can make in servers. But, they probably don't have the resources right now to do it. Even so, I see ARM as a real threat to Intel in servers going forward, if Intel insists on limiting itself with x86. It seems likely, as they are intent on killing Itanium.

  • Report this Comment On May 27, 2014, at 5:43 PM, rav55 wrote:

    @ASHRAF

    "Does Advanced Micro Devices Really Have an $80 Billion Opportunity?"

    AMD NEVER claimed it had an $80 BILLION opportunity.

    What they did say was there is an $80 BILLION addressable market. A reasonable person would expect that some share would be gained in that market.

    But then you do disregard facts when they are inconvenient don't you Ashraf?

    This is another non-storey like the rubbish you wrote about why AMD is not entering the smartphone market.

    You take nothing and make up something negative about it.

  • Report this Comment On May 27, 2014, at 10:33 PM, masterwallstreet wrote:

    In my opinion only, AMD has more room to grow than to fall. They have a superior product at a superior price. They are in the Playstation, XBox One and the Wii. China has opened their doors to game consoles which they will be selling in China. They have the lead in the 64 86 bit ARM server. In my opinion abut Intel, Intel is overpriced and overvalued They are losing billions of dollars in mobile devices, phones and tablets. Most likely they will be losing money with their servers. What will happen to Intel on June 12 when the courts will make their decision on the antitrust monopoly how huge would that fine be and how many lawsuits and fines will follow? How low will this stock go? I guess we will find out on June 12. When the stock plunges how would it be able to afford to pay dividends on this crap.

  • Report this Comment On May 28, 2014, at 12:32 PM, H2323 wrote:
  • Report this Comment On May 28, 2014, at 1:42 PM, H2323 wrote:
  • Report this Comment On May 29, 2014, at 3:56 AM, rav55 wrote:

    @H2323

    12.5" HP EliteBook 725 G2 w/ FHD (1920x1080) w/ Kaveri Pro APUs

    http://www8.hp.com/no/no/products/la...ml?oid=6732446

    14" HP EliteBook 745 G2 w/ FHD (1920x1080) w/ Kaveri Pro APUs

    http://www8.hp.com/no/no/products/la...ml?oid=6732430

    15.6" HP EliteBook 755 G2 w/ FHD (1920x1080) w/ Kaveri Pro APUs

    http://www8.hp.com/no/no/products/la...ml?oid=6732438

    And evidently there is a new FX processor being released on June 4th.

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