AMD (AMD), which manufactures and markets microprocessors and graphics processors used in PCs and servers, will report its Q4 2014 and full year results on January 21.The consensus revenue estimate for the quarter is $1.54 billion, a robust 33% over the prior year level. Having incurred losses for several quarters, the company returned to profitability and positive cash flow in Q3 2013, as it reported its highest sequential growth (26%) in the last five years. We indeed believe that AMD will close fiscal 2013 on a strong note. Renewed demand in its traditional PC segment, and growth opportunities in new markets, are allowing for improvement to its financial and operational performance.
Having restructured its operations in the last few quarters, AMD intends to now focus on executing its new product plan to accelerate growth and expand its new businesses to improve profits. Though PCs remain an important part of its overall portfolio, AMD aims to derive 40%-50% of its revenue from other high growth businesses in the next two to three years, including semi-custom and ultra-low power processors, professional graphics processors, as well as processors for dense server and embedded solutions. Expanding its footprint in alternate growth markets insulates AMD, to some extent, from declining PC shipments. It also increases its focus on differentiated products. It is a credible strategy.
Our price estimate of $3.55 for AMD is at a discount of approximately 10% to the current market price. We will update our valuation after the Q4 2013 earnings release.
PC Shipments To Decline For The Second Consecutive Year In 2013
The main factors leading to the slump in the PC market include: 1) the cannibalization by tablets and smartphones; 2) the weak reception for Microsoft's Windows 8 OS; 3) the slowing enterprise market; 4) consumer softness in mature markets (the U.S. and Western Europe); and, 5) the slowing demand from emerging markets. PC sales declined marginally in 2012, and research firm IDC estimates shipments to decline by 10.1% in 2013, slightly above its initial forecast of a 9.7% decline. 
However, while overall PC shipments are expected to decline for the next few years, IDC estimates the portable PC segment to grow at 8.7% between 2013 - 2017.
AMD believes that its updated product portfolio better positions it to gain share in the traditional PC market as well as generate higher revenues from new growth markets. In its last earnings call, the company declared that it is seeing improving demand for its products in the traditional PC market. It has a robust pipeline of upcoming products and platforms which we believe could fuel demand for its products in 2014. 
Strong Game Consoles Sale To Aid Revenue Growth
AMD devised a unified gaming strategy in March 2013 that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. It believes that it is effectively positioned to drive the next revolution in gaming and now powers all major next generation consoles including Sony's (SNE) PlayStation 4, Nintendo's Wii U and Microsoft's (MSFT) Xbox One.
AMD believes that gaming is one of the key pillars of its semi-custom chip business. It shipped millions of units to support the next-generation Sony and Microsoft game consoles in Q3 2013, which utilize AMD's system-on-chip Jaguar core and Radeon HD graphics chips. Going by the rate at which these game consoles are being sold, we expect they were an important factor driving AMD's revenue growth in Q4 2014, and will continue to be going forward. While Sony's PS 4 sold 2.1 million in the first two weeks, the Microsoft Xbox achieved 2 million in 18 days.  
In Q3 2013, AMD generated over 30% of its revenue from its semi-custom and embedded business, exceeding its target of earning 20% of its revenue from these markets by Q4 2013. AMD believes that the two segments will be important revenue drivers in subsequent quarters as well.
The Mac Pro Deal To Increase AMD's Share In Professional Graphics
Apple (AAPL) has used AMD's dual FirePro professional graphics solutions in its recently launched Mac Pro desktop. With AMD's FirePro D300, D500 and D700 GPUs, Mac Pro users will have the ability to seamlessly edit full-resolution 4K video and simultaneously render effects in the background, and still have enough performance to power up to three high-resolution 4K displays.
AMD currently accounts for 21% of the professional GPU market, which is dominated by Nvidia (NVDA). However, the Mac Pro deal can considerably elevate AMD's standing in the professional GPU market. Digitimes reports the deal could increase AMD's professional GPU market share to 30% by the end of 2014. 
Strong performance in professional graphics was an important factor that drove AMD's growth last quarter. The company marked its fifth consecutive quarter of revenue and share growth in the professional graphics business segment, which accounts for approximately 7% of its valuation (as per our estimate). We expect the Apple Mac Pro deal accelerated AMD's revenue growth in the segment in Q4 2013 and will continue to drive graphics revenue going forward.
Disclosure: No positions.