The 2017 analyst day highlighted multiple positives for Advanced Micro Devices Inc, which could lift AMD stock price even higher.
Shares of Sunnyvale, California-based chipmaker Advanced Micro Devices Inc. (NASDAQ: AMD) gained 11.7% in yesterday's trading session, bolstered by multiple positive developments which could fuel AMD stock even higher in the long term. AMD stock closed the last trading session at a price of $12.75, gaining a huge 27% in just the last 6 trading sessions. We think the stock is now well past the bottom with the technicals as well as fundamentals now implying that the stock could be headed for a sustained bull run.
AMD's Deal With Intel?
The Intel-AMD graphics licensing deal has been doing the rounds ever since Intel's deal with NVIDIA (NASDAQ:NVDA) ended in March 2017. In what was a clear endorsement of the rumors, Fudzilla confirmed them in a recent post. Fuad Abazovic wrote, "We can now confirm the rumours that Intel has given up on Nvidia because it has written a cheque to license AMD's graphics."
While there is no confirmation or any further details from either AMD or Intel, we can look at the NVIDIA-Intel licensing agreement to get a sense of what this could mean to AMD, in financial terms. Intel was licensing NVIDIA's IP at a fee of $1.5B over 5 years, or $300M in annual licensing fees. Assuming that AMD will collect a similar amount in annual licensing fees, it could give a significant boost to profit margins, since these are dollars which flow straight down to the bottom line. To put things in perspective, AMD reported a pretax loss of $448M in FY 2016, equating to a pretax loss margin of -10.5%. The additional $300M in licensing fees alone could take that to a 3.5% loss, without accounting for any top line growth or gross margin expansion, which the company expects in FY 2017. Hence, a licensing deal with Intel could be the difference between a profit or loss in FY 2017. Or, in other words, the difference between AMD achieving/missing on its corporate goals this year. As highlighted in the corporate strategy analyst day presentation by Dr. Lisa Su, profitability is one of the key commitments/targets for AMD in FY 2017.
AMD Unveils EPYC, A $16B Opportunity
AMD held its annual investor day yesterday (May 16) and unveiled its latest data center chip named 'EPYC', which is based on the latest Zen architecture and can be scaled up to 32 physical cores. Outlining the strategy behind EPYC, a slide in the presentation by Forrest Norrod, Senior Vice President and General Manager Enterprise, Embedded, and Semi-Custom Business Group, compares the EPYC single socket server against Intel's dual socket options. The implication is significant, implying that the Sunnyvale-based chip maker could offer EPYC as a low cost, single-socket competitor to Intel's dual-socket servers, which will definitely help the company gain market share in the server CPU segment, 99% of which is currently dominated by Intel. Norrod pegged the TAM (Total Addressable Market) for EPYC at $16B in 2020, which is huge given AMD's marginal market share in this space at the moment.
AMD Targeting The High End Of Graphics
The investor day also had lots of significant information about the other big bit of AMD's business, its GPU business. As per the presentation by Raja Koduri, chief architect of Radeon Technologies Group, AMD gained 10 percentage points of market share in the sub $299 desktop space to corner 31% market share in 2016. In the overall desktop GPU market, the company held a 28% share (2016), which was up from 20% in 2015. The theory of market share gains is already panning out in the GPU space.
In another slide from the same presentation, the Radeon technologies boss highlighted that the top end of the GPU market (price > $200) has less than 15% of volume but greater than 66% of the margin dollars (profits). The latest 'Vega' GPUs should help the company realize this high-end opportunity, which should help in driving overall profit margins higher.
AMD Stock Technical Analysis Indicates Further Upside
As we had written in our earlier coverage, AMD stock was poised for a breakout going into the last trading session (on May 16). The 11%+ rise means that AMD stock price has now breached its 20-day and 100-day moving averages on the daily chart. The stock will now face a resistance at its 50-day moving average, which is currently at 12.95. On the downside, the stock has support at the 12.93 and 11.9, from the 100 day and 20-day moving averages, respectively. The Moving Average Convergence Divergence (MACD) indicator is also flashing a bullish signal with the MACD line cutting the signal line from below, indicating that AMD stock price could be headed higher over the coming sessions. All in all, AMD stock looks set for exciting times, both in the short-term as well as long-term. In a follow-up to this post, we will also outline our long-term view of AMD stock, after taking into consideration the latest data points and other information from the analyst day presentations.
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