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Deutsche Bank Remains Sidelined on AMD Stock; Here’s Why


Put another tech conference in the record books.

On Tuesday, Deutsche Bank wrapped up its 2019 Technology Conference in Las Vegas, at which Advanced Micro Devices (AMD) CFO Devinder Kumar presented. In a note following the presentation, 5-star Deutsche Bank analyst Ross Seymore summarized the bank’s “key takeaways” form the talk.

As you’d expect from AMD, it was a tale of two cities — or rather, different tales concerning AMD’s two main divisions, Computing and Graphics (C&G) and Enterprise, Embedded, and Semi-Custom (EESC). Let’s tackle the bad news first.

EESC

With only $2.35 billion in sales last year, EESC is the smaller of AMD’s two main business divisions, and by far the slower-growing as well. (It also boasts worse profit margins than C&G). Last year, AMD’s EESC sales grew barely 3% year over year, and in fact remain stuck below sales levels of four years ago. Now, it looks like things will be taking a turn for the worse.

Worse, through the end of 2019, AMD is looking for about a 35% decline in sales from the “semi-custom” portion of the business.

That’s the bad news. The good news is that elsewhere within EESC, things are going swimmingly — and even in semi-custom, the news isn’t quite as bad as the 2019 sales decline makes it look.

For one thing, AMD is making great gains in its server business, targeting “double-digit” server market share at some point within the next two to four quarters. Buoyed by “significant traction” in sales of 7-nanometer CPUs, and a greater number of platforms adopting AMD’s wares, the company even believes that it will eventually reach, then surpass, the 25% market share in servers that it once held more than a decade ago. Rivals Intel and NVIDIA are expected to respond to these gains, but AMD doesn’t see their responses as much of a risk to its plans, calling them neither “broad-based” nor “pervasive.”

Meanwhile in semi-custom, the company is predicting that this year’s sales slump will be followed by a ramp in sales in the second half of next year as Microsoft places orders to outfit its new Xbox gaming console in the latest in AMD tech.

C&G

Turning to AMD’s flagship C&G division, with its $4.125 billion in annual sales and robust 11.4% operating profit margin, AMD is predicting growth in graphics chips in both Q3 and Q4 of 2019 (and in 2020 as well) “driven by both datacenter GPU and client GPU.”

Average sale prices for “compute” chips are also “up gen-on-gen for the latest generation of Ryzen, which should have a margin tailwind over time,” Seymore reports. On the graphics side of the business, the analyst sees sales more than doubling in the second half (year over year), while in “compute,” he’s looking for more modest, but still respectable growth of 22%.

Overall, Seymore is predicting 49% year over year sales growth in the C&G division in this year’s second half — a very rapid growth rate indeed.

All that being said, at a share price approaching $30, and with most analysts still forecasting only about $0.47 per share in GAAP earnings this year, there’s a very real question of whether AMD’s prospects are already baked into the share price at its current valuation of more than 64 times earnings. Granted, Seymore takes a more optimistic view of earnings this year (predicting per-share profits of $0.64, so 47 times current-year earnings). But his 2020 prediction of $0.89 falls short of consensus estimates for $0.95 per share — indicating that future growth may not be as robust as other analysts expect.

Accordingly, despite all the good news AMD unveiled in Las Vegas this week, Seymore continues to stick with its “hold” rating on the stock, and its $29 price target.

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