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Joe Osha, the semiconductor analyst at Merrill Lynch, on Friday morning offered four predictions on Advanced Micro Devices (AMD, along with one warning about the stock. First, here come the predictions.

  1. AMD’s share gain in server processors will continue unabated, with Intel’s (NASDAQ:INTC) Woodcrest/Blackford product having only a minimal competitive impact…We think AMD could get close to 40% of the server processor business by the end of next year.
  2. AMD won’t get past 15% of the mobile processor market in 2007…it’s true that the company wants to release an optimized mobile architecture next year…[however] that product isn’t coming until the fourth quarter of next year, which is too late to have much of an impact on 2007 numbers…No doubt we’ll see some product annoucement from PC OEMS, including Dell (DELL), but we’ll expect those to be mostly large form-factor desktop replacement products.
  3. Dell will give AMD less business than the bulls hope for the near term, but more than even the biggest bulls hope for over the the long term…We stand by our prediction that AMD will see between 1.5 millionand 2 million untis at Dell between now and the end of the year, but no more…The math over the long term is a lot more interesting. There’s no reason that AMD can’t have 30% of Dell’s business overall by 2008, which suggests annual volume of 14 to 15 million units.
  4. AMD will allow ATI’s discrete GPU [graphics processor] business to slowly die on the vine, although management will never be willing to admit it…the company’s long-term strategy is clear enough. AMD wants to be able to engage Intel across the market, including the enterprise business, and that means being able to offer the same kind of stable platforms to PC OEMs that Intel has managed. That can’t be done with third-party chipset vendors.

Which brings us to Osha’s warning.

From an investment standpoint, AMD may well make sense over the long term, and we really do think that the company will tend to gain share against Intel in all three PC market segments over the long term. From [a] valuation and earnings momentum standpoint, however, the stock does not make sense.

He thinks Street estimates are way too high.

Even if we continue to build the share gains we’ve discussed into out model, we can only get to $1.02 in GAAP earnings for next year, or $1.18 excluding stock options expensing. The Street is showing $1.34 in pro-forma earnings, which would seem to reflect a continuation of the dramatic market share improvements that AMd registered in 2006. Based on Intel’s improved roadmap that’s unlikely to happen again in 2007, at least in desktop and notebook markets. Also to be noted is the impending closure of the ATI acquisition, which will almost certainly be dilutive in 2007 even if we don’t build in much market share loss to AMD in discrete GPU. Our preliminary work shows 89 cents in GAAP earnings for the combined entity, and we regard that as generous. Long-term share gains should keep the stock from declining much, but the 2007 picture makes it very hard to see how investors can make much money on the stock during the next 12 months.

AMD shares closed down 77 cents at $26.21 on Friday.

Source: Merrill on AMD: Four Predictions and a Warning