Apple Insider reported Monday that Apple (AAPL +2.04%) plans to launch a 27-inch iMac with a "5K" Retina display at a media event in October. While news of a next-generation iMac is hardly surprising, the report also claims that this new Mac will feature a graphics processor from Advanced Micro Devices (AMD +5.66%) ("AMD"), displacing archrival NVIDIA (NVDA +2.61%).
The two questions that investors need to ask are:
- How likely is this to be true?
- Will it have a meaningful impact on AMD's business?
Let's dig in.
It's probably true
AMD's management has repeatedly signaled that one of its key strategic goals is to regain graphics market share, so the company competing aggressively for the next-generation iMac contract wouldn't be much of a surprise.
It's not as though Apple and AMD are strangers; indeed, AMD graphics chips power Apple's current Mac Pro and have powered prior iMacs and MacBook Pro models.
While we'll only know if this is true when the alleged new iMacs launch, I'd say there's a good chance that this rumor is true given that AMD's management has signaled confidence in its ability grow graphics market share during the second half of the year.
Quantifying the financial impact to AMD and NVIDIA
Let's look at the potential financial impact to AMD and NVIDIA of respectively winning and losing the next-generation iMacs.
To illustrate, Apple reported selling approximately 16.3 million Mac products in total during its 2013 fiscal year. Keep in mind that Apple's major drivers in the Mac are the following:
- MacBook Air (11-inch, 13-inch)
- MacBook Pro (13-inch, 15-inch)
- iMac (21.5-inch, 27-inch)
- Mac Pro
According to Gigaom, Apple in 2009 sold just over 7 million Mac laptops and slightly more than 3 million Mac desktops. I would guess that, at a bare minimum, the ratio of Apple laptops to desktops sold is 7:3, although given how popular (and affordable) Apple's MacBook Air laptops are (and the secular trend toward more mobile devices), the ratio has probably shifted more in favor of the MacBook.
From these numbers, let's assume Apple sells 19 million Macs this year. Then assume that of those, about 5.7 million Macs are desktops (this is a very aggressive assumption), with the overwhelming majority being iMacs rather than the expensive Mac Pro model.
This puts us deeper into the proverbial rabbit hole: How many of those approximately 5 million iMacs will feature a discrete graphics chip? And what average selling price should we assume per graphics chip?
Note that Apple offers five "base" models of iMac (A few of which use Intel (INTC +5.40%) chips):
- $1,099 21.5-inch iMac (Intel integrated GPU)
- $1,299 21.5-inch iMac (Intel integrated GPU)
- $1,499 21.5-inch iMac (NVIDIA low-end discrete GPU)
- $1,799 27-inch iMac (NVIDIA mid-range GPU)
- $1,999 27-inch iMac (NIVIDIA high-end GPU)
I have no concrete information about the mix here, but I'm going to guess share distributions within iMac sales of approximately the following:
- 10% of sales
- 40% of sales
- 15% of sales
- 20% of sales
- 15% of sales
Now I'm going to assume NVIDIA gets about $25 per GPU in the 21.5-inch iMac, $50 per GPU in the cheaper of the 27-inch iMacs, and $100 per GPU in the high end. Again, these numbers are guesses based on NVIDIA's public statements that OEM GPU sales tend to be much lower ASP than higher-end gaming GPUs.
Working out the math, I would guess that if AMD wins the discrete GPU slot in all next-generation iMacs that use such GPUs, the revenue contribution will look something like this:
[(0.15) x ($25) + (0.20) x ($50) + (0.15) x ($100)] x 5 million = $143.75 million.
Is this meaningful?
According to the consensus estimate, AMD is on track to generate about $5.8 billion in revenue this year, while NVIDIA is looking at about $4.6 billion. If we assume that for the following year, NVIDIA loses $143 million related to this business and AMD gains $143 million, this would represent a 2.46% increase in sales for AMD (all else held equal) and a 3% decline for NVIDIA (again, all else held equal).
However, keep in mind that this number hinges on the assumptions that I made for both iMac unit volumes, mix, and GPU average selling prices. Significant changes to those assumptions would lead to dramatically different numbers.
Finally, the assumptions here also assume that NVIDIA is designed out of all discrete GPU-toting iMacs. If Apple uses AMD for just the alleged high-end model then this, too, changes the potential picture.
