Microprocessor and graphic processors manufacturer AMD (NYSE:AMD) is set to report its Q2 2014 earnings on July 17. Owing to a decline in PC shipments, market share loss to Intel (NASDAQ:INTC) and late entry in new emerging markets, AMD incurred a heavy net loss in 2012. Though it reported a net loss for full year 2013 as well, the renewed demand in its traditional PC segment and growth opportunities in new markets helped AMD return to profitability and positive cash flow in Q3 2013. Last year, AMD completed the restructuring phase which helped generate strong revenue by successfully ramping up a diverse set of new products. It started 2014 on a strong note with 28% annual growth in revenues, primarily driven by GPU and semi-custom APU sales, and we expect the positive momentum to continue for the rest of the year.
AMD's management claims that its strategy of transforming the company is working well and the company is on track with its goal to derive 50% of its revenue from high-growth markets, including semi-custom and ultra-low power processors, professional graphics processors as well as processors for dense server and embedded solutions, by the end of 2015. The company's focus on alternate growth markets has helped offset, to some extent, the continuing decline in PC shipments. With the renewed wafer supply agreement with GlobalFoundries and re-profiling of its near term debt, AMD feels confident of accomplishing its financial goals for 2014 and beyond.
Our price estimate of $3.79 for AMD is at an approximate 10% discount to the current market price. We will update our valuation after the Q2 2014 earnings release.
Increasing Professional Graphics Market Share
For many years, AMD has been underrepresented in the professional graphics segment, which is dominated by Nvidia (NASDAQ:NVDA). Nevertheless, competitive pricing and improving hardware have helped increase AMD's professional graphics market share from 12% in 2009 to 20% in 2013. Strong performance in professional graphics was an important factor that drove AMD's growth in the last few quarters. In Q1 2014, the company marked its seventh consecutive quarter of revenue and share growth in the professional graphics business segment. AMD is increasing its investment in the area to build a stronger relationship with key customers.
In December last year, Apple (NASDAQ:AAPL) announced that it is using AMD's dual FirePro professional graphics solutions in its new Mac Pro (a professional desktop computer). AMD has custom-designed the GPUs specifically for Apple. DigiTimes reports the deal could increase AMD's professional GPU market share to 30% by the end of 2014. 
Apple Mac Pro is a solid long-term revenue stream for AMD's professional graphics division as these are high-priced, high-margin products. The dual D300 GPUs in the lower-priced Mac Pro are estimated to be worth $1,200, while the D500 GPUs powering the higher-end version of the desktop are valued at $2,500.  If the company manages to hold onto the Mac Pro deal, it stands to gain significantly in the long run. If it is able to score additional design wins with Apple for its consumer products ( iMacs, Mac mini, Macbooks) in the future, it can gain additional share in the market.
Expanding APU Lineup To Increase Demand For AMD Processors
Last quarter, AMD witnessed an 8% sequential and 12% annual decline in its computing solutions group on account of lower desktop and chipset revenue, partially offset by higher notebook revenue. Growth in notebook shipments was driven by the rising customer demand for AMD's Beamer and Kaveri APUs. With the launch of the A8 and A10 APUs, the company has upgraded its product portfolio in the desktop channel, which it believes will spur growth in the future.
Though AMD has significantly lowered its dependence on the PC market, it continues to derive a considerable portion of its revenue from the segment (including GPUs and APUs). The company expects overall PC shipments to decline 7% to 10% in 2014. It intends to focus on growing in segments where it is underrepresented, such as the commercial PC business.
AMD's new APU lineup aims to build on its leadership in graphics across devices. The company claims that its 2014 A-Series APU, which combine the power of a multicore CPU with AMD Radeon graphics, are the most advanced and developer-friendly performance APUs from AMD to date. Around 47% of the Kaveri silicon is devoted to graphics, as compared to 31% in Intel's Haswell chips.  AMD claims to have a new set of commercial products in its pipeline with which it aims to drive growth in the segment in 2014. It has a number of design wins which will ramp up in the second half of the year.
AMD shipped more than 80 million APUs between 2011 and 2012. The company expects shipments to rise to 150 million in 2014 and cross 300 million within a few years. 
New Design Wins In Game Consoles To Drive 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 now powers all major next generation consoles including Sony's PlayStation 4, Nintendo's Wii U and Microsoft's (NASDAQ:MSFT) Xbox One.
Strong demand for game consoles was a key factor behind AMD's growth in Q1 2014 as the company shipped millions of units to support the next-generation Sony and Microsoft game consoles. Sony and Microsoft together sold more than 7 million units, more than double the number of prior generation consoles sold in their first quarter of introduction.  AMD expects its semi-custom business to continue growing strongly as game consoles ramp up throughout the year. It claims to be on track to win 1-2 new semi-custom designs this year.
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