Technology
Beyond Virtual Reality, Rising Cash Could Boost AMD in 2016 and Beyond
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Advanced Micro Devices Inc. (NASDAQ: AMD) has been a disappointment for longer than most investors can remember. Still, AMD actually has some analysts and investors who see big upside ahead. That upside may not be until late in 2016 or even after. There are a lot of risks and caveats when it comes to AMD, the biggest being viability and survivability down the road if its situation does not improve.
Wells Fargo is one of the more bullish firms when it comes to AMD. That means that their Outperform rating and $3.00 to $3.50 valuation range are well above the consensus Thomson/First Call estimate of $2.31. David Wong, the firm’s analyst covering AMD, pointed out that AMD managed to grow its cash and cash equivalents in the December quarter and that AMD’s March quarterly guidance suggests that cash proceeds from its assembly and test joint venture deal may help the cash balances rise further in the first half of 2016.
Wong asserts that this cash growth potential is possible even with AMD’s sales outlook being below estimates (revenue was $958 million, down 10% sequentially and down 23% from a year earlier). AMD’s guidance is for 14% lower in sequential sales. The computing and graphics revenues were up 11% sequentially to $470 million, but down 29% annually. Microprocessor ASP rose sequentially due to notebook mix but were down annually due to lower average sales prices on notebooks. The key GPU average sales prices rose sequentially and rose annually due to higher add-in-board channels.
While AMD’s Enterprise/Embedded/Semi-Custom segment sales were down, AMD’s inventory declines are helping cash flow ($678 million versus $761 million exiting the prior quarter). On the cash balance, Wong said:
AMD’s cash and equivalents exiting the quarter stood at $785 million, up from $755 million exiting the prior quarter. AMD expects that at the end of the coming quarter cash and equivalents will be down about $100 million, excluding possible cash proceeds from its joint venture deal associated with its assembly and test facilities which the company has previously said should bring in net cash of about $320 million on close, expected in the first half of 2016.
AMD characterized VR as disruptive as the original iPhone, a comparison we made in our VR Handbook. AMD intends to deliver GPU technology that addresses the demanding latency and refresh requirements of VR, and facilitate a “plug and play” experience for the user. AMD’s approach with the ecosystem is to open source, providing developers access to tools to fully utilize AMD’s hardware. AMD made no comment on whether or not it supplies the silicon in the additional processing unit for Sony’s Playstation VR. Along with NVIDIA, we think AMD benefits from demand for its GPUs from VR applications in 2016. AMD’s new Polaris architecture on 14nmFF process technology should also stimulate demand.
Canaccord Genuity’s Matthew Ramsay only maintained his Hold rating, but that does come with a $2.30 price target. His tone is steady and unenthusiastic:
Overall, we believe AMD’s diversification strategy continues to show gradual progress and a refreshed roadmap could position the company for more defensible long-term sales beginning in the second half of 2016 as the roadmap moves to FinFET, crossing a significant competitive hurdle for the company… we anticipate stronger GPU sales as Polaris GPUs launch mid-year, solid unit growth of console sales largely offset by average sales price declines, and new semicustom wins to contribute to second half of 2016 growth, leaving GPU or semi-custom sales catalyzed by virtual reality as upside to our estimates. We are starting to see the righting of the ship at AMD, but remain on the sidelines for now given the decidedly uncertain macro environment.
24/7 Wall St. always likes to offer a balanced approach, so it seems appropriate to include a post-earnings view from Bank of America Merrill Lynch. The firm has an Underperform rating with a $2.00 price objective. The firm said that AMD has risks in a weak macro environment and in competitive risks, but the tug-of-war between AMD’s legacy PC business and its new gaming wins remain a challenge. Their take: It is still just too risky to call for an AMD recovery until PC sales bottom.
S&P Capital IQ also maintained its Hold rating and $2.50 target on AMD this week. The firm noted:
We keep our 12-month target price at $2.50, on price-to-sales below peers to reflect our view of AMD’s inferior market share and lack of profitability. We widen our 2016 operating loss per share view to a $0.31 loss from $0.24 loss and start 2017’s at a $0.24 loss. … We see benefits from PC stabilization and efforts to diversify in non-PC markets, but are wary about AMD’s lack of profitability.
AMD shares were up a sharp 16% at $2.09 at Thursday’s close, versus a close of $1.80 on Wednesday. AMD’s consensus analyst target price is $2.31 and its 52-week range is $1.61 to $3.37.
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