The Strategist

Why the 2017 was a bad year for AMD

11/20/2017 - 03:50

In 2016, stocks of AMD enjoyed increased demand from investors. They soared by almost 430% on the back of growing sales of chips for the year. However, the situation changed in 2017. By March, the company’s papers rose in price by another 30%, then slowed their growth and collapsed after the publication of the quarterly report in late October. Over the past month, AMD fell by 22%, losing all growth since the beginning of the year. Now, investors are doubting doubt the prospects of the technological giant.

Investors have decided that the new Ryzen processors will be able to compete seriously with chips from Intel, while the next generation of discrete graphics cards on the Vega architecture will take the market share away from NVIDIA. For a while it seemed that AMD's strategy would work. The new Ryzen processors demonstrated a speed comparable to the performance of Kaby Lake chips from Intel, and they were cheaper at the same time.

Large corporations, including Microsoft and Baidu, agreed to use AMD’s top processors Epyc in their data centers, potentially weakening Intel's monopoly in the server solutions market. AMD also planned to hit Intel in the notebook market with the help of the Mobile Ryzen processor family with integrated graphics accelerators Vega. The new Radeon video cards based on the Vega architecture also showed good results in comparison with the NVIDIA GPU line on the Pascal architecture. The top-end graphics card for Radeon Vega Frontier Edition workstations was launched to compete with NVIDIA in the corporate market.

In addition, crypto-currency miners spurred the demand for video cards. Besides, investors believed that with the upgrade of the Xbox One and PS4 game consoles, the demand for AMD single-chip systems will grow (they are used in both consoles). These main areas will help increase revenue, and any weakness in one will be compensated by straights in others.

At first glance, AMD still demonstrates excellent growth rates. In the last quarter, its revenue increased by 25% in annual terms, net non-GAAP profit soared more than 300%. Net profit under GAAP was $ 71 million compared to a loss in the same period last year. According to analysts' forecasts, the revenue and profit of non-GAAP in 2017 will grow by 23% and 193%, respectively. 

Yet, the majority of AMD shareholders did not expect Intel and NVIDIA to deliver such strong retaliatory strikes. Initially, Intel co-operated with AMD in development of graphics processors and built-in memory for the new chipset, which was the basis of the new line of Radeon accelerators. This seemed a winning solution for both companies and a threat to NVIDIA.

Soon, after, however, Intel announced creation of the Core and Visual Computing group and callen on Raja Koduri, the former senior president of AMD and chief developer of Radeon cards, to join the team. The group was to develop its own discrete graphics accelerators. This became an unpleasant surprise for AMD and NVIDIA, and shares of the companies reacted to the news with a fall. In addition, Intel introduced a new microarchitecture Coffee Lake (further development of 14-nm architecture Skylake), ahead of the performance of Ryzen processors in conventional desktop computers. In the market for top-end systems, Skylake-X from Intel competed with AMD's Threadripper processors, which are two 8-core Ryzen, combined with the Infinity Fabric system (albeit at a much higher cost). AMD Vega chips were equal in speed to NVIDIA cards on the Pascal architecture, but the same thing happened with the prices, which somewhat limited the demand in the market.

In addition, NVIDIA introduced the new generation of Volta GPU for enterprise users. As soon as Volta video cards appear in regular stores next year, AMD will have to try to catch up with them in performance. In addition to all, NVIDIA signed a contract for the supply of single-chip solutions for the game console Nintendo Switch. In recent months, it has been more popular than Xbox One and PS4.

Analysts believe that these unfavorable factors will somewhat slow AMD's growth in the future. According to forecasts, next year the revenue and profit of the company will grow by 13% and 169%, respectively. Although these figures cannot be called bad, they are much worse than those of 2016. Moreover, AMD shares do not look cheap at all. Currently, their cost is 38 times higher than the forecasted profit for the next year, which is more than the forward P/E ratio of Intel, equal to 14, and only slightly lower than the forward coefficient of P/E NVIDIA (42). In other words, AMD's stock prices contain extremely high expectations of investors, but it is a big issue whether the company can justify them.