Technology

Why AMD Could Continue to Outperform NVIDIA and Intel

Jon C. Ogg

Published: June 16, 2016 11:25 am

Last Updated: January 13, 2020 6:43 am

Advanced Micro Devices Inc. (NASDAQ: AMD) is one of the semiconductor companies that remains in a challenging position. Earnings may still remain elusive, but new efforts and market trends may finally be working in AMD’s favor. A fresh report from Canaccord Genuity raised AMD to Buy from Hold, and the upgrade is also now projecting a tie for the street-high price target of $6. Canaccord Genuity’s Matthew Ramsay previously only had a $3.25 price target.

What drove Thursday’s upgrade is AMD’s FinFET products and VR-infused console trends. Ramsay even sees the cycles setting up a return to profitability for AMD. The intellectual property, the business tied to servers, and even the semi-custom efforts all remain as call options for AMD upside.

Ramsay believes that AMD’s risk/reward remains unbalanced to the upside despite the recent stock move higher. This report has a lot of impact for Intel Corp. (NASDAQ: INTC) in the personal computer (PC) and server processor markets, and it has a lot of NVIDIA Corp. (NASDAQ: NVDA) exposure for the graphic processing units (GPU) market in gaming and virtual reality.

Thursday’s Canaccord Genuity report said:

With an improved GPU and x86 CPU roadmap now on leading FinFET process nodes, recent business divestitures and IP licensing deal infusing cash to lessen balance sheet risks, and just ahead of a gaming console upgrade cycle catalyzed by 4K and virtual reality (VR) content, we are upgrading shares of AMD from Hold to Buy.

Most certainly, roadmap execution, competition and financial risks remain; however, we remain impressed with the new management team and our estimates that assume only modest market share recovery in core markets should yield material upside to consensus and a quick recovery to solid profitability given lower expense levels necessitated by the company’s recent struggles. Further, several potential upside call options remain including new semi-custom engagements with hyperscale cloud partners, a re-entry into the high-margin x86 server market, and future CPU and GPU IP monetization efforts.

Another boost is coming from x86 CPUs, with Zen returning market relevance. Ramsay sees the Zen x86 micro-architecture having 40% IPC improvement, making AMD again a viable second source, versus Intel in the PC and notebook markets, and for reentry into the server market longer term.

In the gaming GPU market (including developers/tools), an aggressively priced Polaris should allow AMD’s market share recovery from the low-20% handles up toward 30% versus NVIDIA.

Also, the move to VR and 4K is viewed as likely increasing the gaming console refresh cadence. Ramsay’s report said:

Historically, gaming console refreshes across Sony’s PlayStation, Microsoft’s Xbox and Nintendo franchises have been every ~6 years; we believe the emergence of VR and 4K content hastens this pace to ~3-4 years and will serve as a benefit to semi-custom volumes for AMD.

The AMD report does acknowledge some risks here. First off is that Intel and NVIDIA are both formidable competitors. Also, AMD has roughly $1.2 billion in net debt and a current non-GAAP loss position. That leaves financial risks in place, despite recent cash infusions from the test and packaging divestiture and server IP license joint venture in China. Those generated roughly $320 million and $293 million, respectively. An additional risk is that AMD needs to prove it can deliver sustained product road map executions and fight the competition from NVIDIA and Intel.

Ramsay also raised his target on NVIDIA on Thursday. The Buy rating was unchanged, but the price target was raised to $55 from $45. Ramsay’s higher NVIDIA target was based on an earnings growth acceleration as GeForce momentum having multiyear legs and parallel GPU computing spreads to new markets.

VR and deep learning are also expected to catalyze new growth for NVIDIA. Ramsay’s $55 price target was based on shares trading at approximately 22 times the firm’s 2020 non-GAAP EPS estimate of $3.00, and then discounted back at a 10% weighted average cost of capital.

As far as whether AMD can outperform Intel and NVIDIA ahead, investors should consider how much AMD has recovered from its lows and how much it is already up versus peers. AMD shares have already almost tripled off of their 2015 lows. AMD shares are also already up 54% year to date, and the stock is well above its consensus analyst price target. Relative performance metrics are as follows:

• Intel is down 6.6% year to date and up only 3.2% over the past year.
• NVIDIA was last seen up 44% year to date and 46% higher than this time a year ago.

Thomson First Call still shows some questionable earnings and revenue trends for AMD. After revenues of $3.99 billion and earnings of −$0.54 EPS in 2015, the consensus estimates ahead are as follows:

• −$0.26 EPS and $4.03 billion in revenues for 2016
• −$0.10 EPS and $4.25 billion in revenues for 2017

AMD shares were last seen trading up 2.5% at $4.54, in a 52-week range of $1.61 to $4.71. AMD’s consensus analyst price target is still listed as $3.68, but that may ratchet higher based on recent analyst target changes.

NVIDIA shares were down 1.5% at $46.64, with a market cap of almost $25 billion, or about seven times that of AMD’s $3.6 billion. NVIDIA has a consensus analyst target of $44.48 and a 52-week range of $19.09 to $47.77. It also has a dividend yield of close to 1%.

Intel shares traded down 1.2% to $31.24 on Thursday. The market cap is roughly $148 billion, and the stock has a consensus analyst target of $35.49 and a 52-week range of $24.87 to $35.59. The dividend yield is 3.25%.