The Gaming Segment Could Get A Boost Too
Professional gaming is another segment which could benefit from AMDs latest GPUs. AMDs ‘Computing and graphics’ segment (which includes discrete GPUs and professional graphics) has trailed Nvidia’s gaming segment for long. The disparities continued through the first 3 quarters of 2016, which saw Nvidia’s gaming revenue swell by 35% YoY while AMD managed to grow the relevant segment by a meager 2.5% (this segment does include AMDs PC and notebook processors which haven’t been doing too well, either). However, the latest Vega-based GPUs should help AMD drive growth in this segment once the latest GPUs hit the market. AMD is leaving no stone unturned to lure gamers as the company unveiled 17 “extreme performance” pre-built PCs designed around Ryzen at CES 2017. If early Vega reviews (1) are to be believed, NVIDIA Corporation (NASDAQ:NVDA) will surely have to work harder to earn its gaming revenues in 2017.
AMD Financials
Advanced Micro Devices, Inc. (NASDAQ:AMD) has also worked over the recent quarters to deleverage its balance sheet and improve its cash position. Even though the current debt-to-equity ratio (D/E) of 4.2 is eye-popping, to say the least, AMD has worked itself out of a hole. The company had just over $2.24B (Long term +short term debt) in debt and a negative equity position at the end of December 2015. The company has paid off its short-term obligations worth $230M and $375M worth of long-term debt over the last 3 quarters. The net cash position (Cash – Debt) has improved from a negative $1.4B at the end of December 2015 to a negative $378M at the end of the last quarter. Hence, while AMDs balance sheet is still risky, the company is moving in the right direction. (See also: The Advanced Micro Devices Inc. (AMD) Stock Rally Is Not Yet Over).
Apart from the top line benefits of the new revenue streams, AMD’s bottom line could certainly benefit from newer revenue streams. The fact that AMDs latest products are comfortably matching/outperforming the best from Intel/NVIDIA could also give AMD an exposure to the high-end CPU/GPU market. AMD has historically competed on costs at the lower end of the markets. AMDs bottom line record has been disappointing, without a doubt. An exposure and market share gains in the higher margin CPU/GPU markets will help turn around AMDs bottom line in 2017. AMD’s profit margins will also be aided by lower interest expenses as a result of AMDs recent funding round (2). Hence, we expect AMDs profit margins to get a lift in 2017, driven by higher margin products as well as lower finance costs. This should continue to strengthen AMDs balance sheet.
Putting It All Together
AMDs recent product launches (Radeon Instinct GPUs and Ryzen CPUs) have been really competitive, matching the best of NVIDIA GPUs and Intel CPUs. This should help the company compete at the higher end of the GPU/CPU markets, which will aid AMDs profit margins in 2017. While the 2016 rally was driven by speculation, 2017 could see an earnings/fundamentals driven rally for AMD. Investors should seek out AMD stock as a high risk/high reward play in 2017. A failure of the new products to deliver results could see AMD stock collapse under the weight of current expectations. However, any meaningful success in the AI/datacenter markets accompanied by market share gains in the traditional CPU/GPU markets could see AMD stock deliver another year of blockbuster returns.
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Additional Links:
(1) https://www.yahoo.com/news/amd-just-teased-graphics-card-could-stomp-over-215211300.html?ref=il
(3) http://amigobulls.com/stocks-to-buy/top-tech-stocks/?ref=il&ref=im
