Overview:
Advanced Micro Devices (NASDAQ:AMD) just released Q2 2016 results Thursday after market close and the stock went up by more than 10% on Friday. It is easy to understand why since sales were up, non-GAAP profit was achieved and 3rd quarter sales are estimated to be up another 18%. That means in 2 quarters, revenue will have increased by more than 45%. That is a significant achievement.
Moreover AMD's outstanding management team continues to deliver on, and oft times exceed, its promises in spite of headwinds that would stifle many companies. The future for AMD is very bright at least through 2017 and likely beyond that.
In this article, I will outline the reasons for my continued optimism about AMD and why I maintain my $10 price target. In fact, maybe it's time to raise that target price.
"The truth is incontrovertible,
malice may attack it,
ignorance may deride it,
but in the end; there it is."
- Winston Churchill
Here's a 6 point summary of the good news
1. Sales were up significantly sequentially and YoY. Since last year's sequential sales numbers were actually down 9% ($1.03B to $942M), this quarter is even more impressive and a significant sign that the turnaround is in progress.
2. Polaris and the RX 480 continue to see out-of-stock conditions, indicating good demand for the new 14nm GPU. Sales should ramp up significantly in the 3rd quarter because the RX 480 was not released until June 29. I discuss the importance of Polaris here, "AMD: June 29th Release Of Polaris Just One More Step On The March To $10 In 2017".
3. Console sales are always best in the 3rd quarter in preparation for holiday sales. This year there will be a new Xbox One deemed "S" and next year Microsoft (MSFT) will add a new VR (Virtual Reality) 4K model called Scorpio. There is no doubt Sony (SNE) has a new VR ready version of PlayStation in the wings (NEO) that will be released either this year or next. The success of Pokémon Go cannot hurt Nintendo (OTCPK:NTDOY) console sales either, although the current model only uses AMD's GPU chip. There are rumors that Nintendo's next console (NX) will utilize an AMD SoC with an ARM CPU and AMD GPU. It is very obvious that AMD's console business has years and years of sales ahead of it. I discuss console sales here, "AMD: New PlayStation 4 And Xbox Consoles Should Boost 2017 Results Significantly".
4. The licensing deal for x86 (Zen) IP is ahead of schedule too. The deal signed with Chinese firm THATIC in April was predicted to generate $52 million this year but CFO Kumar said now it looks like the fees will be $75 million in 2016, 44% more than predicted just 3 months ago. Read more about the THATIC deal here, "AMD The Good News Continues". CEO Lisa Su says AMD is always on the lookout for good IP licensing deals. It is easy to imagine more Zen and GPU IP licensing deals in the not too distant future.
Mark Lipacis, Jefferies LLC.
"Can you characterize kind of the pipeline of IP deals that you have or technology deals?"
Lisa Su CEO
"Sure, Mark. So the China JV, as you said, we announced it last quarter and it's now in operation. It's actually going well. So we're on track for some of the important milestone deliveries that we had. In terms of the overall pipeline, I would say we have a nice set of interesting opportunities."
5. Zen delivery is moving ahead full speed. Testing by customers is now being done even on dual socket Zen servers. Volume shipment of servers will begin first half of next year. And modest shipments of Zen desktops could happen late this year with volume in Q1 2017. Zen must be impressing customers since design wins were mentioned by Su. That's really good news but not unexpected. Big chip customers like HP, Lenovo and Dell cannot wait to have a product that finally competes with Intel's (INTC) near monopoly.
"We are pleased with the performance we are seeing with Zen hardware, which is helping to expand our customer engagements and accelerating design win momentum across multiple OEMs and ODMs."
6. And it looks like shorts are running for the exits. As you can see from the following charts, short interest has fallen more than 50% in the last year. This is a sure sign that a turnaround is in progress. Expect short interest to go even lower between now and the end of the year.
Conclusion:
Management continues to steer the turnaround ship in the right direction, and even without anything new happening things look good. But in fact there are several possible catalysts that could drive the price even higher. New IP deals, new semi-custom deals, and Zen taking even more market share than previously expected are just a few of the possibilities.
Critics' quibble-quivers are full of marshmallow arrows. A 45% increase in sales over 2 quarters is certainly not a "death spiral" and a software patch to fix a minor electrical problem is not a "disaster". Nor are lower wafer buys from Global Foundries a sign of AMD's imminent demise. Critics (and shorts) need to move on to their next target, they have lost this argument.
AMD remains a strong buy.
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