Does AMD need to update its long-term financial model
Advanced Micro Devices (AMD) is on track to achieve its long-term financial model, which was last updated in May 2017, and does not take into consideration the current market opportunity around its higher margin products.
Data center opportunity
In 2018, Intel’s (INTC) former CEO, Brian Krzanich, and AMD’s CEO, Lisa Su, both acknowledged that AMD will gain some share in the server CPU (central processing unit) market. On AMD’s third-quarter earnings call, Lisa Su stated that the company is on track to achieve mid-single-digit server unit market share by the end of 2018 and increase its market share to double digits in 2019.
She explained that gaining the first 5% share is difficult, as customers are new to the Zen architecture. The second 5% share could come at a faster rate as customers would already be used to the Zen architecture and its 7-nm (nanometer) EPYC CPU would be more competitive with Intel’s 14nm Xeon processors.
If AMD increases its server CPU market share to 10%, that would add $1 billion to its Enterprise revenue in 2019. However, analysts are slightly bearish and expect AMD’s server CPU sales to reach $324 million in 2018 and $842 million in 2019, accounting for a market share of 2.6% and 6.5%, respectively. The EPYC server CPUs are high margin products generating a gross margin of more than 50%. The increasing mix of these high-end products will improve AMD’s overall gross margin.
The above opportunity doesn’t include the opportunity from Radeon Instinct server GPU (graphics processing unit) and growth from gaming and PC markets. AMD is set to report strong growth in the gaming space in 2020 as Microsoft (MSFT) and Sony (SNE) launch their next-generation game consoles.
AMD’s long-term growth will likely see some short-term headwinds like excess GPU inventory from the crypto bubble burst and the slowdown in economic demand due to the United States-China trade war. But these headwinds are unlikely to impact the company’s long-term growth prospects. Investors are betting on AMD’s long-term growth.
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