Advanced Micro Devices (AMD): RBC Introduces Bottom-Up Model and Updated Catalyst Timeline, Reiterates Outperform Rating on the Stock

Advanced Micro Devices (AMD) has ambitious plans. These plans have been public knowledge for a while, and many investors will have come across them at some point. Specifically, for 2020 and beyond, AMD’s long-term financial model sets the following targets: (1) double-digit revenue growth, (2) 40-44% gross margins, (3) 26-30% opex, and (iv) $0.75+ EPS. That said, RBC Capital analyst Mitch Steves has his own model and roadmap for the chip giant and he’s out with an update.

Steves says, “the most common question we receive on AMD is ‘How to model for high-single-digit revenue growth in 2019?” The analyst believes “computing was likely a significantly higher percentage of revenue in Q4 relative to investor expectations…[while] ASPs on the server side are likely mis-modeled, as the pricing on EPYC 2 should drive the ASP up 25%+, particularly in Sep-qtr.” ASPs is an extremely important piece, as many companies in the industry are down on lower selling prices. Should ASPs rise, as the analyst believes, so should AMD’s stock.  

Continuing looking at high-single-digit 2019 revenue growth, Steves says, “Data Center specific graphics chips are likely to grow materially in 2019E due to a low base,” as the analyst’s overall model “should better reflect the company’s underlying business trends.” Steves now models AMD “on a bottom-up basis” with an assumed 25%+ ASP increase for servers this year.

7nm chip, Steves believes manufacturing partner “TSMC is now in full production mode” on the chip, which is expected this year and would help the company take market share from Intel, which is still struggling with its 10nm chip. Furthermore, the analyst anticipates “updated Ryzen chips (in Q2) and the launch of Navi around June/July. Around June, we also anticipate seeing the EPYC 2 line-up helping to explain the step function in both revenue and ASPs in Q3.”

New product launches are expected to help AMD continue increasing its market share. Steves says, “from a share gain perspective, we continue to believe that ~10% is fair for Q4 of 2019, with line of sight to 20–30% longer-term.”

All in all, Steves maintains an Outperform rating and $34 price target on AMD stock. (To watch Steves’ track record, click here)

After AMD rose and crashed in 2018, the chip maker is off to a strong start to 2018, up more than 20% for the year. Nevertheless, analysts don’t know what to do about the company. TipRanks analysis of 18 analyst ratings show a consensus Moderate Buy rating with an even split of nine Buy recommendations and Hold. The $26.44 price target represents nearly 13% increase from its current value. (Get TipRanks’ free stock analysis report on AMD)


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