Major Trends Stand Behind Our Valuation For AMD

NEW YORK (Trefis) -- AMD (AMD) manufactures and markets microprocessors used in servers, desktop personal computers and notebooks. It also manufactures Graphics Processor Units (GPUs) used in PCs to process information for graphic displays. AMD faces competition from PC microprocessor maker Intel (INTC) as well as mobile chip companies including Nvidia (NVDA) and Qualcomm (Qcom).

Last year was a tough one for AMD as it failed to keep up with changing consumer trends, which eroded investor confidence. Here, we look at some of the trends that may affect its performance and, in turn, could affect our current valuation $8.39 for the company.

See our complete analysis for AMD.

Global PC Trends

Last year we saw a slowdown in PC shipment growth mainly on account of two factors.

First was the hard disk supply shortage caused by flooding in Thailand. The floods affected the operations of almost all the players in the PC supply chain. We are of the view that as a result of the shortage, original equipment manufacturers (OEMs) will likely give preference to high-end PCs, which might be disadvantageous to AMD, which sells lower-priced processors compared to Intel.

The second factor affecting PC sales was a slowdown in the overall economy. Combined with market dynamics favoring mobile devices such as tablets and smartphones, the soft economy continues to negatively impact upon PC shipments. Research firm Gartner predicts the market will remain weak and forecasts PC shipments to grow at a moderate 4.4% this year.

The desktop and notebook processor markets contribute around 50% to our price estimate for AMD. Hence, trends in the PC market will have a significant impact on our valuation. We believe the effects of the hard disk drive shortage will persist in the second quarter of 2012, with the market reviving thereon. Additionally, the potential in emerging economies will be the driving force for growth, countering a slowdown in the developed markets. Hence we expect the PC market (except netbooks) to see a 4.7% growth this year.

Increasing Importance of Smartphone Chips

Smartphones and tablets are expected to replace PCs as the growth engines for the semiconductor market. According to research firm Gartner, the worldwide mobile devices sales to end-users will grow by about 7% in 2012, mainly fueled by growth in smartphones and tablets.

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