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AMD’s Growth Story Recently Hit a Snag: Where's It Heading Now?

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Part 6
AMD’s Growth Story Recently Hit a Snag: Where's It Heading Now? PART 6 OF 15

How Does AMD Plan to Improve Its Gross Margin?

AMD’s gross margin

Advanced Micro Devices (AMD) is entering the high-end market to improve its gross margin and return to operating profits by the end of fiscal 2017.

The company’s non-GAAP (generally accepted accounting principles) gross margin expanded from 31% in fiscal 3Q16 to 32% in fiscal 4Q16, even though the company’s revenue fell 15% sequentially. For fiscal 1Q17, the company expects to improve its gross margin to 33% while its revenue falls 11% sequentially.

How Does AMD Plan to Improve Its Gross Margin?

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AMD outsources its manufacturing to Global Foundries, the foundry business it spun off in 2009. The company’s gross margin is likely to improve as it realizes the cost benefits arising from its 14nm (nanometer) nodes and Ryzen’s higher ASP (average selling price).

Jefferies analyst Mark Lipacis expects AMD’s gross margin to continue to expand, from 32% in fiscal 4Q16 to 33% in fiscal 1Q17 and 36% in fiscal 4Q17 as it expands in the high-end market. The company’s target is a gross margin of 36%–40%.

AMD wins on price-to-performance

Even though AMD has entered the intimidating high-end market with its Ryzen CPU (central processing unit), it’s delivering a performance similar to Intel’s (INTC) Broadwell CPU at half the price. Note that Broadwell is two generations old. Intel has launched two more generations of CPUs: Skylake and KabyLake.

While AMD may not be able to beat Intel in terms of performance, it can deliver a better price-to-performance ratio. Although Intel can reduce its prices to AMD’s level, it likely won’t do so, as this would contract its gross margin considerably. Even if Intel transitions to a 10nm node, it won’t be able to reach AMD’s price-to-performance ratio.

AMD to co-exist with Intel in the high-end CPU market 

AMD’s upcoming combination CPU and GPU, called “Raven Ridge,” will have a significant price-to-performance advantage over Intel’s high-end units. AMD has reduced Intel’s technology advantage with its efficiency gains. This should help AMD to sustain in the high-end market until 2018, when the industry will likely transition to a smaller node.

Though AMD expects to improve its gross margin to 36%–40% over the next few years, its margin should remain far below Intel’s and NVIDIA’s (NVDA). While Intel runs its own fabs, NVIDIA is a fabless company.

Next, we’ll look at the gross margins of the three above-mentioned companies and learn why such a wide gap exists.

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