From BofAML:
AMD: raising PO
to $14 from $12
Unique asset in high growth markets with attractive product pipeline and improving execution. In our view, AMD is the only vendor that can challenge both INTC in PCs/servers and NVDA in gaming/pro-graphics/deep learning markets. Collectively this is a $50bn duopolistic addressable opportunity, with AMD holding less than 5% value share currently, with any success highly accretive to AMD's current operating model at just 32% GM/0% OI (vs. NVDA at 59%/32%). Second,
AMD has shown strong capability to build semi-custom chips, and monetize its patent portfolio, which creates more growth leverage. Meanwhile, the Street remains sidelined with just 38% Buys, and with little expectation of success, that
should create substantial potential for EPS revisions.
Success in mid-range graphics adds confidence to potential success in high-end graphics and gaming PCs. The most important question around AMD is forecasting success with new products when AMD faces very tough competitors at NVDA and INTC. Our view is that: 1) Last years Polaris mid-range graphics-card launch was first real evidence of AMD launching a capable product and quickly gaining market share against a very well established incumbent NVDA; 2) We assume AMDs next two attempts at capable products the high-end graphics card called Vega, and gaming PC microprocessor called Ryzen could be similarly successful since they target a space where AMD already has a strong and established brand name, and where those markets today are served by only one large player. Note we assume very limited success in servers, which will likely be evident more in 2018. Even in that market, our upside scenario EPS power of 70c-$1 depends on 5-10% market share which will not be easy, but is doable given AMDs wide range of design capabilities in CPU and GPU design.
Raise PO to $14, upside scenario $20, downside risk $9/sh. We now assign a $14 PO which is based on 2.6x 2018 EV/S (vs. 2.2x prior). We use an EV/S methodology since AMDs earnings model is still in early stages and will be more apparent in the next 2 years. Our choice of 2.6x corresponds to ~8% operating margins for AMD in 2018 which drives pf-EPS of 27c, as shown in the base case describer below. In an upside scenario we assume more success in gaming GPUs and PCs, which can help drive 90c in EPS at a 16% operating margin. At 20x-25x PE, inline with growth comps, results in upside scenario of $20/share valuation. In a downside case, we estimate EPS of 10c in 2018, and valuation of $9, based on just under 2x EV/S This is at the low-end of semis market.
Next catalysts: next-gen Zen gaming PC in Q1 ($4bn TAM, launch Dec-13), Zen server
in Q2, Vega high-end gfx in mid'17; and third semi-custom win in 2H17E