It’s Easy to Fall in Love With Advanced Micro Devices

I realize that most people opening this article will be shocked to see that I am the author of a title that seems glowingly positive about Advanced Micro Devices (NYSE: AMD  ) . You're probably expecting some "bait and switch," coupled with a detailed look at why you shouldn't fall in love with AMD.

Nope. None of that here. In this article, I'd like to present what is more or less the bull case for AMD from the perspective of somebody who is admittedly fairly bearish on the stock.

The upside, if AMD succeeds, could be tremendous
AMD's market capitalization is about $3 billion today, and if you believe the current sell-side estimate, the company is on track to generate $5.96 billion in revenue, which -- at a glance -- puts the company at a rather inexpensive looking price-to-sales ratio of 0.52. This is seemingly dirt cheap if price-to-sales is your go-to metric.

Things don't look as rosy if you look at the company's price/earnings against current consensus, which sits at $0.19/share. This means that, on a forward basis, the stock trades at about 21.4 times this year's earnings, and about 17.6 times 2015E consensus. At a glance, this doesn't really look dirt cheap, but it's nowhere close to the most expensive semiconductor player on the planet. (Note that these are non-GAAP numbers, but we'll brush that aside for now.)

That said, it's hard to justify, say, a $5, $6, or even $7 stock price based on these current estimates. Being long AMD is a bet that these estimates are too low. So, if you're an AMD bull, you probably see a good deal of upside to current estimates. The question, then, is where could it come from?

Taking a look at the moving parts of AMD's business
The following slide from the company's annual stockholder meeting illustrates fairly well where management sees the growth opportunities:

Source: AMD.

Graphics to the rescue?
In professional graphics, AMD is in competition with rival NVIDIA (NASDAQ: NVDA  ) , which holds the lion's share of the market (it's a roughly 20/80 split ), so if AMD can gain share there without completely crashing its margins to do so, this could represent a fairly lucrative opportunity. At a recent conference, AMD indicated that the company has been aggressively hiring in order to bolster its capabilities there to gain share.

Game consoles only the beginning for semi-custom, it seems
AMD is also counting on semi-custom deals, such as the contracts it won to do the game console chips for Sony/Microsoft. AMD executed very well with that project and, as a result – according to AMD – this has sparked intense interest from other clients looking for semi-custom products. While it's really difficult to imagine that there are too many individual contracts as large and lucrative as the game console deal for AMD, enough of such deals in the aggregate could move the needle.

Embedded and dense server could potentially drive upside
Next -- and these should probably be lumped together -- is the company's focus on "dense server," or micro-servers as some call them. AMD is attacking this market with designs that will come in both ARM and X86 flavors depending on what the customer wants.

While the size of this market is unclear, and while AMD appears to be one of the leading micro-server players, the idea here is that the company could -- by playing here -- improve its server share dramatically from current sub-5% levels. It also looks as though the embedded designs and dense server chips will be very similar, per AMD's recent roadmap.

Ultra low-power client
Finally, AMD's position in the client market during the last few years hasn't been particularly good, but AMD is promising both an Android strategy through the utilization of ARM-designed cores, as well as a brand-new X86 core for the traditional Windows PC market. While it's unclear how much share AMD can take, the idea, once again, is that the TAM expands, which, with proper execution, should lead to revenue upside.

See why it's easy to fall in love with AMD?
There's no denying that if AMD can capture meaningful professional graphics share, continue building up a robust pipeline of semi-custom deals, grab real share in the server market, and revitalize its story on the client side of things, it should see some pretty dramatic revenue upside. Indeed, if we do some back-of-the-envelope math, working under the following (admittedly optimistic) assumptions:

  • AMD can grow total sales from ~$6 billion/year -> $8 billion/year
  • AMD keeps gross margins at roughly 35% (this is conservative since this assumes no leverage)
  • AMD keeps operating expenses at roughly $1.7 billion to $1.8 billion per year

This would ultimately lead to $1 billion/year in operating income. Applying an Intel-like 10 times operating income multiple, and netting out the approximately $1 billion net debt position that the company has (which would get much easier to pay off at this run rate), we get a business that could command a market capitalization of approximately $9 billion or, at the current share count, about $12/share.

Now, growing sales by 50% isn't going to be easy, and keeping operating expenses flat in support of such growth is probably not a realistic assumption; but it is clear that the bulls are expecting a rather large payday if AMD can actually execute. But that's the million dollar question, isn't it?

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Read/Post Comments (8) | Recommend This Article (1)

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  • Report this Comment On June 07, 2014, at 3:36 AM, raghu78 wrote:

    Ashraf

    AMD talked of 1 - 2 semi-custom designs which will finalize before end of 2014 and add to the revenue in 2015. These are likely to be in the USD 250 - 500 million range per deal per year size. There are another 1 - 2 on the horizon which will materialize sometime later (maybe in 2016). These are not just gaming but also other areas. (read transcript for details)

    http://seekingalpha.com/article/2252433-advanced-micro-devic...

    Then you bring in the low power ARM A57 based HSA chips running Android which will launch in mid- 2015 and then AMD have an opportunity to grow their tablet market share meaningfully. Here again AMD needs to secure design wins but they could target the high end Android gaming tablets like Nvidia does with K1. Also we can wait and see if AMD has design wins for Mullins which allow it to make a start in the tablet market. The next gen 20nm x86 Puma+ based Nolan also should help their chances in the tablet market. But like Nvidia you are going to see AMD only in high end tablets which sell for USD 200+.

    As for the PC segment AMD has started targetting commercial client where AMD has been either not represented or underrepresented. The recently announced HP Elitebook 700 series design win for Kaveri is a decent start to a very big market opportunity.

    http://www8.hp.com/us/en/ads/elite-amd-products/elitebook-72...

    http://www.cnet.com/news/hp-elitebooks-to-ship-with-new-amd-...

    Given Rory Read's experience at Lenovo AMD has a good shot at cracking commercial design wins at Lenovo, Dell, Acer, Toshiba. We should watch out for news on this space.

    Finally the dense server market is where AMD can grow their server share in short term. But the real opportunity for AMD in servers is from 2016 when they go up against Intel high end Xeons armed with the 2 high performance cores - ARMv8 K12 and x86-64. Jim Keller was optimistic that K12 will extend the performance range of ARM. In fact its quite clear that K12 is a very high IPC core like Cyclone which can scale to 3.5+ Ghz

    http://techreport.com/review/26418/amd-reveals-k12-new-arm-a...

    "Keller even outright said that "the way we built ARM is a little different from x86" because it "has a bigger engine." I take that to mean AMD's ARM-compatible microarchitecture is somewhat wider than its sister, x86-compatible core. We'll have to see how that difference translates into performance in the long run."

  • Report this Comment On June 07, 2014, at 6:10 AM, rav55 wrote:

    @Ashraf

    Nice piece. Well balanced despite your caveats! However you did not complete your case.

    The real strength of the new and improved AMD lies in it's grab for Intel server market share in the ARM ecosystem using it's in house OEM SeaMicro. Hotswapable hardware beyond just harddrives and pin compatibilty between x86 and ARM which will allow the same hardware to be spec'd for two different APU's: ARM or x86 depending on the customer's needs add up to some very interesting server hardware. This can also mean lower capitalisation costs and of course ARM silicon will allow for lower O&M costs as well as it is more energy efficient. Since AMD also has lower R&D budget percentage relative to sales and lower corporate overhead relative to sales their silicon is cheaper than Intel silicon. As we all are so very well aware of due to the CM Group throwing the baby out with the bathwater these last couple of years.

    This is the real strength of AMD's recovery and it comes at the expense of Intel market share.

    You know this as well Ashraf and while we both are the opposite sides of the same coin we both know that ANY dip in server market share for Intel will not be pretty for them.

    And we both know that AMD is not the only player going after this market.

    The success of AMD in ARM servers goes beyond the ability to desgn and put them in the market. This also reduces their dependence on x86 sales and Intel's impact on their bottom line and in fact makes them a very good acquisition target for a fiscally sound company. The price/sales ratio alone makes them attractive. If the acquisition is 3-4x market cap the ROI becomes very short especially if profitability begins to increase. The Radeon portfolio is very attractive and the x86 license would transfer as is the intent of the Justice Department that it do so. Besides Intel can't afford NOT to have x86-64 instruction set. And it is a cross license after all.

    In the past I have deplored the observation that the success of one company is dependent upon the failure of another. That success need not be confrontational and true innovation is dependent upon competition. However when the foundation for success is based upon a monopoly then there is nowhere to go but down.

    Intel enjoys a monopoly position in the server market and ARM will impact servers the same way that ARM has impacted the PC.

    But you do not agree with that.

  • Report this Comment On June 07, 2014, at 12:23 PM, binartech wrote:

    Lets see who fall in love with Intel, when its bribery policy arrives to an end... June 12 is the start of the end. NVDA enjoyed INTC attack to AMD which also will end.

    All damage caused to AMD will start to revert.

    Z U than. And lets see how you explain your Intel theories. You know who will pay AMD debt..... Intel !!!

    Power is like a pendulum, you have it for a while but soon or late, the Pendulum will change position and than you have to be ready for the new Pendulum position. AMD had managed to pass over the worst and the Pendulum is moving !!!

  • Report this Comment On June 07, 2014, at 2:43 PM, ta152h wrote:

    Ashraf,

    You mentioned it is passing, but it's borderline impossible for AMD maintain the same operating expenses. The cost of sales will obviously go up, and I have to expect R&D will go up as well.

    Put another way, Puma is what Jaguar would have been initially, given the design resources to do it. They can still put out new designs at a good pace, but with some features that have to wait until the next release before they are implemented fully. I don't think they will accept those compromises if they don't have to. Think of the opportunities Puma would have given them a year ago, considering Jaguar simply was not competitive in those 4 watt power envelopes.

    The reason I have five figures of AMD shares is they see reality, finally. Don't let the AMD backers fool you with their stupidity, it's still a good company, despite them. You and I know Kaveri sucks, and so does AMD. They are killing it, and their CEO said it didn't have the expected impact. How about when they mentioned you can fit three Jaguar cores in one Kaveri core, and they did about the same work per clock cycle? That's a really good sign. When I can see it and the company can't, it's dangerous because I don't have that much clarity on things. It's got to be obvious, and the company has to be in denial.

    That's no longer the case for AMD. That's why it's important not to get too disgusted with the AMD backers that refuse to see reality. The company itself isn't in that situation or mindset.

    I'm also, finally, encouraged that someone is talking up how bad x86 is, even when they make it. Jim Keller is making it perfectly clear how much better the ARM instruction set. Yes, we all know it, but companies like to forget it. First, AMD said how horrible it was in the late 1990s, but said they were forced to do it. Then Intel said it was awful, and came out with Itanium, at which point AMD said x86 really wasn't a big problem like Intel was saying, and made x86-64. Then Intel said how good x86 was, when Itanium failed.

    We know they're lying, because they've said how bad it is, and then change it to suit their situation. x86 has to die! It's a joke on humanity that it's still being used at all, or even attained importance. Part of the penalty for computer crimes should be writing a small program in 8086 assembly. I paid the price with 286 assembly, and still haven't recovered my sanity. Awkward, frustrating, convoluted, inflexible, etc...

    AMD is finally mentioning how the ARM instruction set opens up new opportunities in performance. It's not self-serving, since they're also making an x86-64 processor. They are telling it like it is, and it's refreshing to see them criticize things that everyone knows are bad, but companies never seem to admit.

    That's why my money is there, and their excellent GPU technology, as well as the wonderful Jaguar/Puma design. I'm also excited about the K12 ARM processor, which is going to be very wide, by all indications.

    I'm still surprised Intel hasn't moved to a more efficient instruction set, especially for phones where the opportunity was afforded. If they don't, AMD will have a pretty important advantage there, which could offset to some degree advantages Intel has. With regard to other ARM players, AMD has more server experience, and appears to be going very large before the rest of the field.

    There's a lot to like going forward, and a good management team.

  • Report this Comment On June 07, 2014, at 10:24 PM, TMFAeassa wrote:

    ta152h

    Thanks for the comment. I am really enjoying the value that you are adding to the discussion.

  • Report this Comment On June 09, 2014, at 11:25 AM, mtechac wrote:

    Ashraf, you think that putting a friendly title to your subtle/direct anti-AMD articles is like putting yourself an invisible veil.

    We can all see you..!! We all know you hate AMD and that your comments are just a way to put AMD directly or subtly down..

    The more you write garbage about AMD, the more you go AMD.. (Ashraf More Dilusional)...

  • Report this Comment On June 09, 2014, at 1:20 PM, wownwow wrote:

    Ashraf,

    Fair logical assessments. Regarding the stock price upward potential, there are ywo more factors:

    1) Short of 18% (as of 5/15/2014)

    2) Emotional effect when people start cheering. With AMD-64, AMD got to $43+ a few years ago not by logical assessment along but with the help from emotional side.

    Even $4 to $8, it's a double with being able to sleep well. Very few stocks will let you sleep well if you expect to get a double.

  • Report this Comment On June 09, 2014, at 1:42 PM, bugsy1339 wrote:

    Ashraf,

    I agree with your analysis here - now the proof is in the pudding more or less. They guided revs up 3% with positive EPS - if they execute and beat this with a strong guidance for Q3 then our "Love" will grow stronger for AMD.

    Also, have to be on the lookout for design wins for Beema, Mullins, and Kaveri - usually AMD gets no love from OEM's maybe this time they break through so far the Kaveri wins look pretty good.

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