Advanced Micro Devices Inc. (NASDAQ: AMD) is one of the semiconductor companies that remains in a challenging position. Earnings may still remain elusive, but new efforts and market trends may finally be working in AMD’s favor. A fresh report from Canaccord Genuity raised AMD to Buy from Hold, and the upgrade is also now projecting a tie for the street-high price target of $6. Canaccord Genuity’s Matthew Ramsay previously only had a $3.25 price target.
What drove Thursday’s upgrade is AMD’s FinFET products and VR-infused console trends. Ramsay even sees the cycles setting up a return to profitability for AMD. The intellectual property, the business tied to servers, and even the semi-custom efforts all remain as call options for AMD upside.
Ramsay believes that AMD’s risk/reward remains unbalanced to the upside despite the recent stock move higher. This report has a lot of impact for Intel Corp. (NASDAQ: INTC) in the personal computer (PC) and server processor markets, and it has a lot of NVIDIA Corp. (NASDAQ: NVDA) exposure for the graphic processing units (GPU) market in gaming and virtual reality.
Thursday’s Canaccord Genuity report said:
With an improved GPU and x86 CPU roadmap now on leading FinFET process nodes, recent business divestitures and IP licensing deal infusing cash to lessen balance sheet risks, and just ahead of a gaming console upgrade cycle catalyzed by 4K and virtual reality (VR) content, we are upgrading shares of AMD from Hold to Buy.
Most certainly, roadmap execution, competition and financial risks remain; however, we remain impressed with the new management team and our estimates that assume only modest market share recovery in core markets should yield material upside to consensus and a quick recovery to solid profitability given lower expense levels necessitated by the company’s recent struggles. Further, several potential upside call options remain including new semi-custom engagements with hyperscale cloud partners, a re-entry into the high-margin x86 server market, and future CPU and GPU IP monetization efforts.
Another boost is coming from x86 CPUs, with Zen returning market relevance. Ramsay sees the Zen x86 micro-architecture having 40% IPC improvement, making AMD again a viable second source, versus Intel in the PC and notebook markets, and for reentry into the server market longer term.
In the gaming GPU market (including developers/tools), an aggressively priced Polaris should allow AMD’s market share recovery from the low-20% handles up toward 30% versus NVIDIA.
Also, the move to VR and 4K is viewed as likely increasing the gaming console refresh cadence. Ramsay’s report said:
Historically, gaming console refreshes across Sony’s PlayStation, Microsoft’s Xbox and Nintendo franchises have been every ~6 years; we believe the emergence of VR and 4K content hastens this pace to ~3-4 years and will serve as a benefit to semi-custom volumes for AMD.