Advanced Micro Devices, Inc (NASDAQ:AMD) stock is up by over 11% this month. The high-margin server processor market will drive AMD stock even higher.
Shares of Sunnyvale, California based Advanced Micro Devices, Inc (NASDAQ:AMD) have been in a steady uptrend since the start of this month. AMD stock closed the last trading session at a price of $14.2 a share, up 11.4% from the start of this month. As we had covered in a recent post, AMD is clearly hurting Intel Corporation (NASDAQ:INTC), both in the desktop CPU market as well as the server processor market. However, investors should note that Intel dominates the server processor market with nearly 99% market share, and hence, any revenue from this segment would be incremental revenue for AMD. So, how big an opportunity is this for AMD?
AMD Gunning For A Big Slice Of The Server pie
The recent Linley Processor conference provided some answers. In a presentation at the conference last week, AMD provided an estimate of the market share it aims to capture in this market. And, how much of the market is the company going to corner? Baird analyst Tristan Gerra offered an answer in a recent investor note. As reported by Benzinga, Gerra noted "AMD's estimate that it would achieve 10-percent market share target for its data center processor EPYC in one to two years. AMD said EPYC's architecture responded to customers' need for higher core count, scalability and I/O, with the Zen core architecture offering significantly lower cache and higher scalability." Now that we have an answer to what AMD is aiming for in the next couple of years, let's quantify the server processor market opportunity for AMD.
Sizing The Server Processor Market
As we have mentioned earlier in the post, it is no secret that Intel has a near monopoly in the server processor market. At least, that was the case till last year. Not anymore. With EPYC being launched into the markets, Intel has a worthy competitor. However, coming back to the market size, Intel's data center group numbers should be able to offer some answers. According to the most recent 10-K filing of Intel, the Datacenter group generated revenue of $17.2 billion in 2016, which was up by 7.9% year-over-year. Assuming that the market will continue at this pace (which is conservative given the accelerating growth in datacenter market), the market for server datacenters should be worth $18.56 billion this year and should grow into a $20 billion market by 2018.
A $2 Billion Opportunity Advanced Micro Devices
As seen above, the server processor market could be a $20 billion market in 2018. And, if the AMD management's internal estimates are anything to go by, AMD could corner 10% of the market. In other words, server processor sales could add $2 billion to AMD revenue in 2018. To put things in perspective, the $2 billion server processor revenue could add 46% to AMD's 2016 revenue of $4.27 billion.
It is clear that the re-entry into the server processor market could be highly rewarding for AMD. However, the significant revenue impact isn't the only positive. Investors should also take note of the fact that Intel's Data Center Group (DCG) operates at a significantly higher profit margin compared to the other operating segment.
Intel's DCG segment generated operating income of $7.52 billion, for a segment operating margin of 43.7% in 2016. For comparison, AMD reported operating profit margin of 2.1% and hasn't reported an operating profit margin of over 25% during any quarter since 2010.
Once you see the above chart, it is not hard to understand why AMD is gunning for a share of the server processor market. At a 40% operating profit margin, the incremental revenue from server processor sales could net AMD $800 million in Operating profits next year. For comparison, AMD reported an operating loss of $372 million in 2016.
To sum up, the opportunity in the server processor market will present AMD with strong topline growth as well as expanding profit margins. The result will be accelerated earnings growth, which should lift AMD stock higher over the foreseeable future.
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