AMD : NYSE : US$4.06
Technology — Hardware – Semiconductors and Related Technologies
EARNINGS RECOVERY DRIVEN BY DIVERSIFIED
GROWTH, FOCUS ON OPERATING MARGINS; RESUMING WITH BUY, $5 PRICE TARGET
We believe AMD’s diversification strategy
positions the company to drive solid top-line growth and a return to
sustained profitability despite PC market headwinds. In fact, we are
comfortable with the lower gross margin of recent sales, with shared R&D
costs and minimal marketing expense for semi-custom gaming designs
making this new business accretive at the operating line. Long term, ARM
servers offer opportunity for re-entry into a growing $12B+ market and an
attractive call option on AMD shares. Nearer term, we believe consensus
underestimates GPU share gain and new semi-custom opportunities.
We resume coverage of AMD with a BUY rating and $5 price target.
Diversification strategy: Reduce PC exposure from 90% in 2012 and
70% today to 50% exiting 2015 by investing in five key growth markets
Concerns: Risks of a re-accelerating secular decline in PCs remain as
AMD is still roughly 70% exposed. Sustainability of strong semi-custom
console launches at Sony and Microsoft needs to be proven. Pursuit of
ambidextrous ARM/x86 strategy could distract focus, limit features of
individual designs, and potentially cause operating expense growth.
We introduce our 2014/15 revenue and non-GAAP EPS estimates of
$6.07B/$0.22 and $6.31B/$0.32, respectively.
Valuation: Our $5 price target is based on shares trading at roughly 16x
our 2015 non-GAAP EPS estimate.