AMD Profit Margins Critical to Price Estimate

Trefis estimates AMD shares are about 1% below the market price, but significant upside or downside exists depending how the company's processor profit margins trend.
By Trefis ,

NEW YORK (

Trefis

) --

Advanced Micro Devices

(AMD) - Get Report

competes primarily with

Intel

(INTC) - Get Report

in the microprocessor market that spans notebooks, desktops and servers. Trefis

estimates the price for AMD's stock at $7.74

, which is about 1% below the current market price.

However, significant upside or downside exists depending how AMD's processor profit margins trend.

AMD has struggled with margins in the recent past in its microprocessor business. The profit margins (earnings before interest, taxes, depreciation and amortization) dipped from 46% in 2005 to 4.4% in 2007 before rising to little more than 10% in 2009. This was primarily a result of significant competition resulting in declining prices while manufacturing costs stayed on the higher side.

AMD encountered challenges in 2006 and had problems in maintaining its supply chain with the significant ramp-up in microprocessor units sold to its diverse group of customers, leading to delays in product shipments. Additionally, in 2007, the net revenue of server, desktop, and notebook processors declined significantly from 2006 because of steep price declines. These events resulted in margins shrinking to a record low by the end of 2007.

Processor margins are very critical to our stock price estimates given their volatility in the past.

Trefis currently estimates that processor profit margins will rise from 10% in 2009 to a little over 25% by the end of our forecast period as pricing competition moderates and AMD gains from productivity improvements stemming from the transition to 45 nm process technology.

However, if these margins were to further increase to 30% during the same time frame there can be a mammoth 46% upside to AMD's price estimate. On the other hand, if they were to improve to only 20%, there can be a downside of as much as 48% to our $7.74 price estimate for the stock.

The Trefis $7.74 price estimate for AMD can be found

here

.

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