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AMD on Track to Hit Long-Term Financial Target ahead of Schedule

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AMD’s product launches for 2019 and 2020

2019 is an exciting time for Advanced Micro Devices (AMD), as the company’s new product announcements could put rivals Intel (INTC) and NVIDIA (NVDA) on their toes. AMD is the only company with expertise in both CPU (central processing units) and GPU (graphics processing unit) technology. The company combines these two technologies to develop semi-custom chips for game consoles.

At the 2019 CES (Consumer Electronics Show), AMD unveiled its 7-nm (nanometer) Radeon VII desktop GPU and 7-nm Ryzen CPUs scheduled to launch in the first quarter. It expects to launch its 7-nm EPYC server CPU in mid-2019 and increase its server CPU market share to double digits by the end of the year.

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The above announcements show AMD’s move to higher margin products as it secures its process node advantage over Intel, which is still stuck with the 14-nm node. AMD expects strong growth momentum in its semi-custom business in 2020, as customers Sony (SNE) and Microsoft (MSFT) launch next-generation game consoles that could drive sales of new processors that command a higher price.

AMD’s long-term financial model

The above product roadmap and AMD’s 2017 and 2018 earnings show that the company is on track to achieve its long-term financial target (last updated on May 2017) earlier than expected. However, the company might see earnings weakness in the first half of 2019 due to the end of windfall gains from crypto-related GPU sales.

AMD’s financial model aims to achieve double-digit revenue growth from new product announcements. It achieved this target in 2017 and 2018 driven by strong revenue growth from Ryzen, Radeon, and EPYC. The company also maintained its operating expense ratio within its targeted range of 26% to 30% in 2017 and 2018.

AMD is yet to achieve its gross margin target of 40% to 44% and EPS target of over $0.75. It has succeeded in improving its gross margin and EPS and is likely to achieve or even exceed the target in 2019.

AMD is also on track to achieve its targeted capital structure, which we’ll look into next.

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