Why Jefferies Just Became Even More Optimistic About AMD’s Future

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Advanced Micro Devices Inc. (NASDAQ: AMD) has had a hard time returning to its glory days. That being said, its stock price recovery has been more than impressive since the lows seen in 2015. And AMD has slowly turned into one of the best-performing semiconductor stocks so far in 2016 as well.

Jefferies issued a key boost to its price target on Monday, June 13, also reiterating its Buy rating. The new price target is $5.50, up from a prior $4.50 target. Investors will want to take note that AMD shares were trading at $4.32 ahead of this call, and the consensus analyst price target was listed below the current share price at $3.56.

With AMD shares rising 3% to $4.44 in early trading on Monday, 24/7 Wall St. wanted to see what all Jefferies was really looking at for such strong upside here. Mark Lipacis, the Jefferies analyst behind this call, talked up the graphics processing units (GPU) around virtual reality (VR). He said:

We raise our price target based on what we believe is good execution on its 14 nanometer Polaris GPU, and pending ramps of 3 new semi-custom products. Last week AMD announced that its first Polaris GPU (RX 480) would ship late June and deliver a high end GPU to the value market. Recent shipments of VR HMDs from Oculus and HTC suggest positive demand for Sony VR systems, which we believe will use AMD GPUs.

Over the past 10 years, AMD has traded in the range of 0.4 times to 2.2 times its enterprise value to sales (EV/S) ratio. The new adjusted price target of $5.50 from Jefferies values AMD at 1.44 times EV/S, based on a projection of 2017 sales of $4.1 billion. AMD currently trades at about 1.20 times sales.

The Thomson First Call consensus estimate calls for AMD revenues to be $4.25 billion for 2017. That means Jefferies is not looking for any massive blowout to the consensus revenue targets ahead.

All in all, Jefferies is seeing a strong GPU product cycle, with last week being the first new product announcement since 2011 when its 28nm products were first released. AMD’s Radeon RX 480 will also begin to ship in June at a cost of $200.

Jefferies also note that AMD has gained 500 basis points of unit share in the desktop market over the past four quarters. Lipacis said on this front:

We think AMD’s share gains stem from its unique capability to offer a high-end graphics card at a reasonable price to the low-end and mainstream markets. We view the Radeon RX 480, priced at $200 (presumably for the 4GB card), as a competitive “VR Ready” solution, which we believe will lead to more unit share gains this year.

Jefferies also noted that AMD has several new product cycles that give it good visibility into growth. These were listed as follows:

  1. its first 14nm FinFET GPU platform (Polaris) with initial shipments in the June quarter;
  2. its new CPU platform, Zen (expected in 2H16 for DT, and 2017 for servers);
  3. 3 semi-custom ramps in the form of 2 mid-cycle console refreshes (expected to be Sony’s PlayStation 4.5, Microsoft’s Xbox 1.5 and Nintendo’s NX).
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Lipacis does acknowledge that there are at least some risks to the upside scenario. Those he cited include weaker sales of personal computers (PCs) into the consumer side, risks pertaining to China and European markets, and execution risks for new products. Lipacis also noted a risk of more aggressive pricing from Intel, as it is the market leader.

Lastly, the downside scenario in this call would generate a price target of around $3 per share. The driving forces behind that downside would be if AMD lost market share in consumer PC MPU, or a loss in market share in the discrete graphics market to NVIDIA. Aggressive pricing by Intel at the low-end of the market or better Intel graphics would drive valuations lower.

AMD shares were last seen trading up 2% at $4.41 late Monday morning. AMD’s 52-week range is $1.61 to $4.71. The shares closed out 2015 at $2.87, so if the early move on Monday holds, it would yield a year-to-date gain of almost 55%.