The investors and analysts think Advanced micro-devices (AMD) is selling more than $ 80 due to concerns about valuation not understanding the massive opportunity available to the chip company. The view is that AMD has taken part Intel (INTC), but the stock is simply not worth $ 100 billion for a company that will target only $ 10 billion in annual sales next year. My Bullish investment thesis has always held that the stock was higher on signs of the company acquiring significant market share from the chip giant, not a moderate $ 10 billion sales target for 2021.
Image Source: AMD Website
Goals for real markets
An investor who made a bullish move on AMD saw double-digit server-chip targets as just the first step. The Bears saw these goals at best the peak point part.
Now, after Intel delayed 7nm chips in 2023/2024, several analysts have come out with overall AMD market share targets in the range of 30% to 50%. AMD had already reached CPU shares of 20%, but the company has managed to generate the substantial data center market share, despite solid revenue gains.
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 large part of the forthcoming revenue impetus is the EESC category, which has reached recent revenue records with both data center and console revenues following years after years of trend.
Source: NextPlatform
The real demand with AMD pumping out 7+ nm chips and Intel working at 10 ++ nm is the reason why the smaller company can not get substantially more market share. Jefferies has AMD at a $ 4.75 EPS at 30% market share and $ 6.50 per share at 50% market share, while Rosenblatt’s Hans Mosesmann company has reached 40% market share at a $ 80 billion TAM.
The key here is not the exact prediction, but the massive size of the market and the potential EPS. Many investors spot with my previous $ 3 + EPS target, and now, a mainstream Wall St. company has mentioned an EPS target potential at $ 6.50. Suddenly, a share price of $ 80 + does not appear expensive.
Analyst Hans Mosesmann is out of predictions from AMD tops the 25% x86 server / desktop / notebook sharing mark in 2021, and will eventually lead to 40% in a few years:
With Intel embarking on a multi-year transition of organizational and business model (trying to recover from its 7nm delays), we see no technical or structural obstacle for AMD to capture more than 40% of the x86 CPU in the coming years.
Updated financial goals
My previous analysis had already outlined how they will look financially with a combined 25% market share after their 2023 TAM. This new analysis looks at profits of 40% markets with a total TAM of $ 80 billion:
- Revenue = $ 32.0 billion
- Gross margins @ 55% = $ 19.25 billion
- OpEx @ 26% = $ 8.32 billion
- Business revenue = $ 10.93 billion
- Taxes @ 15% = $ 1.64 billion
- EPS = $ 9.29 billion / 1.2 billion shares = $ 7.74
Yes, these financial goals seem far-fetched, but AMD has a lot to market. The key here is if the semiconductor company actually has a viable chip lead on Intel and whether gross margins can reach 55% over time.
For 2019, Intel spent about 27% on operating costs. The possibility here is that a much more efficient AMD will spend much less on the R&D and SG&A categories to generate lower OpEx costs as a percentage of revenue. The chip company could clearly decide to spend much more to capture market share and spent more than 30% in the last quarter, allowing 26% to end up aggressively in a competitive sector.
Intel will definitely not continue to donate market share to AMD, but the recent delay of 7nm chip leaves them with limited choice. The recent launch of Tiger Lake on 10nm SuperFin transistor technology has received positive reviews. SemiAccurate appears positive on Tiger Lake’s new chips, but even Intel notes how the 10++ technology is only a slight improvement over the 14++ technology from prior to 2017.
Source: SemiAccurate
While the PCWorld rating Tiger Lake is Bullish on the performance of the chips in single-core performance, AMD’s Ryzen 4000 is still the leader in multi-core performance. Where Tiger Lake has an advantage is potential in small 13-inch laptops that do not require multi-cores.
What the review does not really discuss is the price versus the performance, and this is where AMD typically leads, even if Intel may have a slightly better chip. Ars Technica claims that Intel was very angry about chip volumes and timing, suggesting that even a better chip will not fully reach the market in a while.
In general, all reviews appear to be debating the new CPU chip leader, while questioning whether the actual Tiger Lake performance matches factory design requirements. Investors should remember that this is not the type of scenario where Intel should share 80% market share in notebooks and leave AMD happy with only 20%. A fairly equal debate over the chip leader on performance with limited discussion on pricing performance supports AMD continuing to guarantee more and more market share leading to the 25% target and possibly 40% market targets within reach.
Take away
The key drawback from investors is that it is far too early to dismiss AMD despite the massive gains in the future. Some investors see the stock as expensive, but the company still has significant market share to gain along with substantial improvement to financial goals. Whether AMD actually reaches 30% market share or 50% market share or even higher is still debatable, but what is not debatable is that market share will continue to grow and stimulate EPS.
My previous $ 3 + EPS target appears to be 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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Announcement: I / we have no positions in named shares, and no plans to initiate positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose supply is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as solicitation to buy or sell securities. Before buying or selling a stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing involves risks, including loss of principal.
