Why AMD's VR Opportunity Will Lead To 240% Gains

| About: Advanced Micro (AMD)

Summary

AMD is set to benefit from strong growth in the VR hardware segment as the company already commands 83% share of this market.

AMD’s VR graphic cards are cheaper than the competition, which is why the company has been able to create a strong position for itself in this market.

If AMD continues holding 80% of the VR market in 2020, it will be able to sell over 50 million GPUs to power these devices, leading to $10 billion revenue.

Including the VR opportunity, AMD could deliver $14 billion in revenue by 2020, which will lead to 240% upside in the market cap at its price-to-sales multiple.

After having gained market share in the desktop and mobile GPUs segment against its rival Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NYSE:AMD) is also training its eyes on the virtual reality hardware market. The virtual reality market is in the early stages of development and is expected to be huge in the long run. This is the reason why AMD has decided to make an early move in this market.

So, in this article, we will take a closer look at how big the VR hardware opportunity is and what AMD is doing to tap the same. Also, we will try and gauge the financial impact of the VR opportunity on AMD.

Huge VR hardware opportunity will be a tailwind

The virtual and augmented reality market is gaining traction due to the growing popularity of virtual-reality gaming consoles, PCs designed for virtual reality, and various related devices worldwide. According to IDC, the total revenue opportunity in the virtual reality and augmented reality markets will reach $162 billion by 2020 from $5.2 billion in 2016 across the world.

This represents a compounded average growth rate of 181.3% from 2016 to 2020. The important thing is that hardware sales for virtual and augmented reality will account for more than 50% of the total forecasted revenue during this period. More specifically, the revenue from virtual reality gaming hardware, accessories, and software is expected to increase to more than $5 billion this year from $660 million in 2015.

According to SuperData Research, there will be approximately 55.8 million global consumers of virtual reality content, which will lead to sales of nearly 38.9 million VR devices by the end of 2016. Looking ahead, as the number of virtual reality devices increases, the market opportunity in this segment will rise as well. It is forecasted that the VR gaming hardware market will be worth $8.9 billion next year and $12.3 billion in 2018.

Given this improving hardware opportunity in the VR space, AMD has already made its move in the market.

AMD is making smart moves in virtual reality

AMD recently released its first VR-capable graphic cards, namely the Radeon RX 480, which is based on its new Polaris design. This VR-enabled graphics card is a lot cheaper than peers, which is why it could tap more of the end-market. AMD is expected to sell this graphic card at $199, which is around $100 cheaper than its rival Nvidia's VR-capable graphic cards.

Moreover, it is also a lot cheaper than Facebook's (NASDAQ:FB) Oculus Rift headset that is priced at $599 and HTC's Vive which is priced at $799. Moreover, AMD is also powering the VR headset for the Sony PS4. This will be another tailwind for AMD as Sony is projected to sell more than 1.4 million PSVRs this year.

In my opinion, AMD has made a smart move by launching its VR-capable graphics cards at a lower price as compared to peers because the VR headset market is expected to reach 65 million units by 2020 from the current level of 9.6 million virtual reality headsets. Thus with a low priced VR headset, AMD will be in a better position to sell more of its GPUs for VR headsets.

Additionally, AMD will also benefit from the fact that it is expected to power the next generation gaming consoles. Recently, it was revealed that AMD might have landed three new contract wins for its semi-custom processor designs. These new wins include Microsoft's next-generation Xbox refresh, Sony's new PlayStation, and the Nintendo NX.

Microsoft recently announced two new members of the X-Box One family -- the X-box One S and a next-generation game console project codenamed Scorpio -- that are powered by AMD. Both these new consoles are expected to go on sale next year. The important thing to note here is that Microsoft could bundle a VR headset with the Scorpio console to rival the PSVR. Since AMD is already expected to power the console with its semi-custom chip, it can gain an additional revenue opportunity through the VR headset.

How VR will drive AMD's growth and the potential stock price impact

AMD is betting heavily on the virtual reality market. In fact, according to AMD, the company currently powers 83% of VR systems globally. In my opinion, it won't be surprising if AMD is able to keep up its market share at such strong levels in the long run owing to its cheaply priced VR-enabled GPUs, as mentioned earlier.

More specifically, as already pointed out in the article, sales of VR headsets will grow to 65 million in 2020. Now, if AMD continues to hold 80% of this market in 2020, the company will be able to sell over 50 million GPUs to power these devices. Since AMD is currently selling its VR-enabled GPU at a price of $199, it can generate close to $10 billion in revenue from the VR hardware segment (50 million GPUs X $199 per GPU).

This is two and a half times the revenue generated by AMD in the trailing twelve months, which indicates that the company's performance will receive a major boost due to its foray into the VR segment.

Now, considering AMD's trailing twelve month revenue of $4.1 billion and the potential $10 billion in revenue from the VR hardware segment, the company could post total revenue of around $14 billion in 2020. At this revenue level, AMD is geared to deliver strong upside given its price-to-sales multiple of 2.6. Assuming that the price to sales ratio of 2.6 holds in the long run and AMD manages to achieve its revenue forecast in 2020, the company's market cap will grow to $36.4 billion by the end of the decade.

Currently, AMD has a market cap of $10.7 billion, indicating that in the next four years, AMD is capable of rising another 240%. Now, in 2016 itself, AMD shares have shot up over 300%, so it won't be surprising if it is able to deliver such strong upside in the next four years.

Conclusion

AMD has a huge opportunity in the VR hardware market and it is making the right moves to tap the same. The company is trying to capture more of the end-market with its cheaper VR-enabled GPU, while partnerships with Sony and Microsoft for gaming consoles will be another tailwind. Hence, given the opportunity in the virtual reality market, it is a good idea to stay long AMD.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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