Back from the Grave: AMD
Advanced Micro Devices (AMD) has had a fantastic 2016. AMD stock prices have surged from $2.00 a share to $14.00 in less than a year. AMD’s growth has been impressive, and its growth isn’t done yet. AMD is poised to continue its hot streak in 2017.
In 2004 AMD controlled 41.60% of the CPU market share, with Intel controlling about 60%. As AMD’s market share increased to 48.4% in 2006, so did AMD’s share price, climbing to over $40 per share. But this price didn’t last long. By 2007, AMD’s CPU market share had decreased to 33.3%, and it’s stock by had dropped 50%. The trend continued for AMD: as market share decreased, share price decreased. By 2015, CPU market share had fallen to 23.5%, and the company had to rely on sales in the GPU market. Consequently, book value per share had fallen from $10.58 in 2006 to $-0.52 in 2015.
Nevertheless, AMD looks ready to take back some of the market share from Intel. AMD’s new CPU architecture, dubbed Zen, is powerful, cheap, and efficient. AMD’s Zen chips will be the first to feature simultaneous hyper-threading, meaning each core can output two threads resulting in more efficient processing. While Intel’s Kaby Lake processors are also capable of the same technology, AMD has managed to get the same output at a fraction of the cost. Benchmarks of AMD’s top of the line $499 Ryzen 1800x show a 4% increased hyper-threading performance and equivalent single-threading when compared to Intel’s $1050 i7-6900k. On the first day of its release, the Ryzen 1800x were sold-out on many retailers, including Amazon demonstrating that the demand for cheaper chips is there. Additionally, by the end of 2017, AMD plans to have 6 and 4-core processors released to compete with Intel’s i5 and i3 lines, respectively. If these cheaper chips prove to be as popular as the 8-core chips, AMD will have put themselves in a strategic position to reacquire a large portion of the CPU market share from Intel.
While AMD’s CPU chips are likely to be the key factor in their resurgence, AMD’s dominance in the GPU sector cannot be ignored. While AMD has been faltering in its CPU market share, it has been recovering their GPU market share. In Q2 2010, AMD held 44.5% of the market share in GPUs. However, by Q2 2015, AMD’s market share had fallen to 18%. In the same time, NVIDIA’s market share had grown from 54.3% to 81.9%. AMD’s fall fell in their approach to the GPU market. While NVIDIA took steps forward in developing top-end graphics cards, AMD focused on making mid to low-end graphics cards. At the same time the number of total graphics cards sold was decreasing every year, due to the increase on integrated GPUs, GPUs built on the same chipset as the motherboard. This decreased the need for low-end graphics cards, which is what AMD specialized in. High-end graphics cards on the other hand, have been showing an increase in sales every year, which is why NVIDIA chips have been selling more year after year. In 2016, AMD announced that they are planning to release a new GPU chip called Vega sometime in Q1 or Q2 2017. While no specific details about Vega have been released, Vega videos of Vega performance looks like it will a direct competitor with NVIDIA’s top chip GTX 1080 Ti. The Vega will also be the first AMD chip to be capable of managing 4K gaming at 60 frames per second.
Investors may worry that AMD’s revenue decreased from Q3 2016 to Q4 2017 resulting in a drop of operating income from $70 million to $26 million. This number is attributed to AMD’s drop in it’s semi-custom chips, which follows a normal pattern. Q3 revenues were driven by a cyclical cycle that resulted in increased revenue due to AMD’s semi-custom chip presence in game consoles such as the XBOX One S and Playstation 4. Therefore it is more important to look at year-over-year financials. AMD posted a 15% year-over-year increase in Q4 revenue. Furthermore, revenue for fiscal 2016 increased 7% (Non-GAAP). Furthermore, debt decreased from 2.1 billion in 2015 to 1.4 billion in 2016. Lastly, in 2016 AMD was able to attain a positive cash flow of $13 million after years of negative cash flows. The financials indicate that AMD looks like it’s beginning a turnaround. It is important to note that AMD’s Q1 results may indicate an opposite trend as many consumers will have decreased their purchases of CPUs and GPUs in anticipation of Ryzen and VEGA, respectively.
Considering AMD’s substantial growth in 2016, investors have become wary if AMD could continue it’s growth in 2017. AMD Ryzen chips have shown to be more than capable against Intel’s Kaby Lake processors, and AMD’s VEGA GPU looks ready to compete against NVIDIA’s GTX 1080i. I believe in 2017, AMD will regain market share in both the CPU and GPU chip-space. Combine the increased revenue with semi-custom GPU contracts for Microsoft’s Scorpio, Google’s cloud services, and Alibaba, and AMD is ready to produce a positive 2017 driven by an increase in revenue and healthier balance sheet.
Disclosure: I/we are long AMD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.