Accelerating market share gains cushion against macroeconomic headwinds
Company Overview
Founded in 1969, Advanced Micro Devices (AMD) is one of the largest suppliers of microprocessors and graphics processors worldwide to computing OEMs. AMD designs and sells CPUs and graphics processing units (GPUs) for desktops, notebooks and gaming consoles, as well as for datacenter and professional environments. AMD’s key product families include Ryzen processors for personal computers, Radeon processors for graphics and EPYC processors for servers. By segments, Data Center (including server CPU, data center GPU) accounted for 22% of 2Q22 revenue, Client segment (desktop and notebook PC processors) 33%, Gaming (GPUs and game console products) 25% and the Embedded products (AMD and Xilinx products) division 20%.
Investment Overview
Gaining share in a growing market with $300b total addressable market. AMD sees a $300b TAM consisting of $125b in Data Centre, $50b in PCs, and $37b in gaming on the back of artificial intelligence, trends towards hybrid work and gaming, and greater demand for data centres and cloud as digitalization marches on. AMD has a strong track record of innovation, design agility and proven execution. AMD has been gaining market share from Intel with its share of the processor market reaching 31.3% in 4Q22 compared to 28.5% a year earlier. The company launched a new processor in Aug-22; the Ryzen 7000 processor is a significant improvement from its predecessor, and also more efficient than Intel’s current 12th Gen Alder Lake CPUs. AMD’s technology and product roadmap 2025, including new CPUs in PCs and servers with superior performance, remains on track. We believe this could potentially further increase its market share in next 2-3 years.
Expansion into data centers offers diversification and offsets weakness in PC and GPU segments. AMD has diversified its business into datacenter and embedded segments. Share of Data centre & embedded has increased from 15% in 2019 to 45% in 2022. Their recent acquisition of (1) Xilinx, whose products allow AMD to gain market share in datacenters, as well as in the 5G communications, automotive, industrial, aerospace and defense markets; and (2) startup Pensando, whose platform helps to expand AMD’s data center product portfolio with a high-performance data processing unit (DPU). Growth from these two key segments should help to offset weakening demand for PCs and GPUs due to macroeconomic headwinds.
Well-positioned for revenue growth and margin expansion: Combination of market share gains, roadmap execution & Xilinx/Pensando synergies could drive revenue and earnings growth over the next 2-3 years. On a proforma basis, gross margins of AMD + Xilinx is 52% compared to 48% without Xilinx. In 3-4 years, AMD is targeting gross margins above 57% on product mix and cost improvements. Consensus estimates are more prudent at 54%/55% for FY25/FY26 however they reflect growing margins from 45% in FY22.
We have a BUY recommendation on AMD with a higher TP of US$136.90 per share. Our TP is based on a 3.8x forward P/BV, equivalent to 2.2 SD below its historical average. We like AMD for its strong innovation pace, clear roadmap and reliable execution. Our conservative target P/BV multiple is de-risked in the face of macro uncertainties and slower CPU outlook in the near term.
Risks
Key exposure to PC market. AMD typically derives ~50% of its revenue from the PC end market, which is highly correlated with economic conditions. Any economic headwind could slow down demand.
Direct competitors. AMD has direct competition with Intel and NVIDIA in the microprocessor and graphics markets, respectively. Therefore, any material share gains/losses could result in upside / downside to its earnings outlook.
