The investors and analysts thinking Advanced Micro Devices (AMD) is a sell over $80 due to valuation concerns don't fully comprehend the massive opportunity available for the chip company. The view is that AMD has taken share from Intel (INTC), but the stock just isn't worth $100 billion for a company only targeting north of $10 billion in annual sales next year. My bullish investment thesis has always held the stock was headed higher on signs of the company gaining significant market share from the chip giant, not a measly $10 billion sales target for 2021.
Image Source: AMD website
Real Market Share Targets
An investor making a bullish case on AMD saw the company's double-digit server chip market share goals as just the initial step. The bears saw these targets as the peak market share at best.
Now, after Intel has delayed 7nm chips into 2023/2024, several analysts have come out with overall AMD market share targets in the 30% to 50% range. AMD already had reached CPU market shares approaching 20%, but the company has failed to generate the substantial datacenter market share expected despite solid revenue gains.
The EESC sales reached $565 million in Q2 as server revenues hit nearly $400 million, and other revenues, including semi-custom for the new consoles, were nearly $200 million. A big part of the upcoming revenue boost is the EESC category reaching recent revenue records with both datacenter and console revenues hitting on full cycle after years of trending down.
Source: NextPlatform
The real question with AMD pumping out 7+ nm chips and Intel working on 10++ nm is why the smaller company can't garner substantially more market share. Jefferies has AMD reaching a $4.75 EPS on 30% market share and $6.50 per share on 50% market share, while Rosenblatt's Hans Mosesmann has the company reaching 40% market share on an $80 billion TAM.
The key here isn't the exact prediction, but the massive size of the market and the EPS potential. A lot of investors scoffed at my prior $3+ EPS target, and now, a mainstream Wall St. firm has listed an EPS target potential at $6.50. Suddenly, an $80+ stock price doesn't appear grossly expensive.
Analyst Hans Mosesmann is out predicting AMD tops the 25% x86 server/desktop/notebook unit share mark in 2021, eventually leading to 40% in a few years:
With Intel in a multi-year organizational and business model transition (trying to recover from its 7nm delays), we see no technical or structural hurdle for AMD to capture over 40% of the x86 CPU in coming years.
Updated Financial Targets
My previous analysis had already outlined how their financials will look with a combined 25% market share to their 2023 TAM. This new analysis looks at 40% market share gains with a total TAM of $80 billion:
- Revenue = $32.0 billion
- Gross Margins @ 55% = $19.25 billion
- OpEx @ 26% = $8.32 billion
- Operating Income = $10.93 billion
- Taxes @ 15% = $1.64 billion
- EPS = $9.29 billion/1.2 billion shares = $7.74
Yes, these financial targets appear far-fetched, but AMD has a lot of market share to grab. The key here is whether the semiconductor company actually has a maintainable chip lead on Intel and whether gross margins can reach 55% over time.
For 2019, Intel spent about 27% on operating expenses. The possibility here is that a far more efficient AMD will spend far less on the R&D and SG&A categories in order to generate lower OpEx costs as a percentage of revenues. The chip company could clearly decide to spend far more in order to grab market share and spent over 30% in the latest quarter, so 26% could end up aggressive in a competitive sector.
Intel definitely isn't going to continue donating market share to AMD, but the recent 7nm chip delay leaves them with limited choice. The recent launch of Tiger Lake on 10nm SuperFin transistor technology has gotten positive reviews. SemiAccurate appears positive on the new Tiger Lake chips, but even Intel highlights how the 10++ technology is only a slight improvement over the 14++ technology from prior to 2017.
Source: SemiAccurate
While the PCWorld review of Tiger Lake is bullish on the chips performance in single-core performance, AMD's Ryzen 4000 is still the leader in multi-core performance. Where Tiger Lake has an advantage is potentially in tiny 13-inch laptops which don't need multi-cores.
What the review doesn't really discuss is the price versus the performance, and this is where AMD typically leads even when Intel might have a slightly better chip. Ars Technica claims Intel was very cagey on chip volumes and timing, suggesting even a better chip won't fully reach the market in a while.
In general, all of the reviews appear to debate the new CPU chip leader while questioning whether actual Tiger Lake performance will match manufacturing design claims. Investors need to remember these aren't the type of scenarios where Intel should claim 80% market share in notebooks and leave AMD happy with only 20%. A fairly equal debate on the chip leader on performance with limited discussion on price performance supports AMD continuing to garner more and more market share leading to the 25% target and eventual 40% market share targets being achievable.
Takeaway
The key investor takeaway is that it's far too early to unload AMD despite the massive gains in the stock. Some investors see the stock as expensive, but the company still has significant market share to gain along with substantial improvement to financial targets. Whether AMD actually reaches 30% market share or 50% market share or even higher is still debatable, but what isn't debatable is that market share will continue growing and boost EPS.
My previous $3+ EPS target appears conservative, and investors should own the stock based on AMD eventually reaching the Jefferies EPS target of at least $4.75.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
The Link LonkAugust 19, 2020 at 01:28AM
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AMD: Too Early To Unload - Seeking Alpha
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