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Advanced Micro Devices (NYSE:AMD) is a semiconductor company based in Sunnyvale, California. The company has been incurring losses in the past few years. However, it has returned to profitability in the current year, thanks to its graphics & visuals segment. The company is banking on its graphics segment for future profitability. We will now perform a sum of parts analysis for both the computing and graphics segments of AMD.

Revenue Overview

AMD is generating revenues from both computing and graphics segments. The revenues from computing have shown a declining trend in the past. At present, computing accounts for around 70% of the revenue in the year ended 2012. However, the 2013 expected revenue from computing in around 60% and it will further decrease in 2014. This decreasing revenue trend from computing is because of the declining growth of PC shipments. The table below summarizes the historic and future expected revenue position of the company.

Trends

Revenue in billions

2011

2012

2013(E)

2014(E)

Computing

5.01

4.01

3.21

2.57

Graphics

1.56

1.42

2.14

3.27

Total

6.57

5.43

5.34

5.84

It is expected that he revenue of the company will shift substantially towards graphics by 2014.

Computing Segment

The computing segment of AMD includes x86 microprocessors (as standalone devices or incorporated as an APU), chipsets, embedded processors and dense servers. The company has been facing growth issues in this segment due to the declining demand and decreasing prices of PCs. Prices are decreasing due to an increased competition in the market and the popularity of tablets as a substitute. The purchase of SeaMicro and the deal with Verizon (NYSE:VZ), for server provision, will help the company in keeping the computing business alive for the present. AMD's computing segment is valued at around $152 million (computations to follow). Note that this valuation does not attribute any cash or cash equivalents to this segment. This valuation is substantially below the enterprise value of the business, indicating that the segment does not have an adequate worth at present because of sluggish PC demand and the growing mobile and tablets industry.

Graphics &Visuals Segment

This segment includes GPUs (Graphics Processing Units), including professional graphics, and semi-custom SOC (Systems On Chip) products; as well as revenue received in connection with development services and game console royalties. Recently, the company has been gaining momentum in this segment of the business. The revenues are expected to grow at a CAGR of around 28% (2011-2104). The growth factor of this segment is mainly because of AMD's involvement in gaming. AMD's hardware is featured in the latest consoles by Microsoft and Sony. Moreover, the company is working in MANTLE API, which we covered in an earlier piece. AMD is also dominating the gaming graphics industry and is also planning on releasing a server graphics card. All in all, graphics are AMD's strength and this is also reflected in the valuations. The worth of graphics & visuals is around $2.1 billion according to our valuations (the valuation does not incorporate cash). The valuation of this segment is significantly higher than computing.

Sum Of Parts Analysis

Certain assumptions were made for the sum of parts which are as follows:

1. Historic CAGR is a good approximation for estimating future revenues.

2. Current profit margins are a good approximation for the calculation of future expected net profits.

3. Industry P/E can be used to value the individual segments of the business.

4. Cash is excluded from segment valuation but incorporated in the overall valuation of the business.

5. EPS estimates were apportioned on the basis of Operating Profit; hence all the expenses are incorporated in the valuations.


(Click to enlarge)

*Adjusted Intel and NVIDIA's P/E is used

Intel's (NASDAQ:INTC) discounted P/E is used for the computing segment because AMD is not performing as well as Intel in this segment. A discount of 30% is applied to Intel's P/E. For the graphics segment, NVIDIA's (NVDA) P/E is grossed up by 20% to reflect AMD's better prospects in graphics. The price target is $4.7, indicating that valuations will appreciate in the future; mainly because of the graphics segment.

Conclusion

AMD is facing challenges in the computing business because the booming mobile and tablet industry has affected PC demand and prices. Corporations like Intel are always putting a sustained competitive pressure on the company's computing segment, resulting in the declining performance. However, it does not mean that this segment is dead; computing is still valued at around $300 million. This fact, supplemented by the expertise of SeaMicro and more project wins like Verizon, may guide this ship to more profitable shores. Nonetheless, at present it is a very low value segment for AMD and the company's focus is on graphics.. With valuations around $2 billion, graphics & visuals is a valuable segment for AMD. We believe that AMD will sustain its turn to profitability in the future because of its strength in graphics and the solid performance of the newly launched consoles. This profitability will increase valuations and, therefore, AMD is a buy. The SOP Price Target complements this opinion and shows a 25% upside.

Source: Advanced Micro Devices: Sum Of Parts Shows Significant Upside