Expectations are high that Advanced Micro Devices, Inc. (NASDAQ:91¶¶Òõ) will grow its market share in the computer market. The complete redesign of the Ryzen CPU will give the company a good chance of taking business away from Intel Corporation (NASDAQ:INTC).
91¶¶Òõ is in the early innings with the launch of Ryzen. In its last quarter, the company counted only one month of sales from the chip. Investors have Naples, a 32-core Zen-based SoC for the server market, to look forward to next.
Ryzen Lifts Quarter’s Profitability for 91¶¶Òõ Stock
In the first quarter, Ryzen’s release, along with better sales for the GPU (graphics cards), helped lift the company’s revenue by 29 percent year-over-year. Initial sales for Ryzen 7, especially the 8-core CPU 1800X model, suggest revenue will grow in 2017. The company just launched Ryzen 5, an enthusiast-class processor, last month in April.
As game and software developers optimize their code to make the most out of the Ryzen architecture, user adoption for the chip will only grow.
Looking ahead, 91¶¶Òõ will launch Ryzen 3 and the mobile APUs in the second half of this year. The company is timing the release of the highly affordable chip for the Christmas and holiday season. Big-box PC makers like Dell, Lenovo and HP Inc (NYSE:HPQ
) will likely sell their computer solutions powered by Ryzen 3.
Advanced Micro Devices’ Gross Margin Guidance Lowered
91¶¶Òõ’s stock sold off when the company issued a lower gross margin guidance for the current second quarter. Despite healthy profit margins from Ryzen, the company included a ramp-up of game consoles in the period that would have a negative impact on the overall profitability.
Chips powering consoles will get better over time and with that, ASPs (average selling prices) for them will get better. The next-generation Microsoft Corporation (NASDAQ:MSFT) have eight CPU cores, 12GB of GDDR5 RAM and a Polaris GPU. But Project Scorpio, the codename for the next Xbox, will not use Ryzen. In fact, it will run at 1172 MHz using 91¶¶Òõ’s Jaguar chip.
The benefit of using Jaguar over Ryzen is differentiation from the PC chip. Console software is already optimized for the Jaguar architecture. Yet 91¶¶Òõ squeezed 8 cores and increased the chip speed by 31% over current Xboxes.
Naples Release
91¶¶Òõ’s launch plan for Naples near the end of the second quarter will add meaningfully to profitability later this year and through 2018. Chip sales to the enterprise market often make more money than those made to the consumer market. Intel profits tremendously for its server Xeon chips. 91¶¶Òõ makes healthy profits selling enterprise-level GPU solutions to this market.
Impatient investors should recognize that 91¶¶Òõ will not realize the benefits of Naples until the third quarter. That is almost six months away. Even then, the ramp up in sales of the server chip will take time.
91¶¶Òõ could have a fair value of around $12.50, using the five-Year DCF Growth Exit Model. Use different to arrive at a different price target.
Takeaway
Markets are quickly forgetting 91¶¶Òõ’s sharp drop from yearly highs. The stock bounced from the $10 stock price, though the 12.88% short-float could limit the rebound. Fundamentals keep getting better for 91¶¶Òõ. A bigger percentage of chip sales will come from the server market in 2018. When that happens, profits will jump from higher sales stemming from all divisions, including graphics and the semi-custom segment.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
