key items from the report:
Upgrading AMD from 2-Equal weight to 1-Overweight on Potential for Incremental Share Gains
We are upgrading our rating on the shares of resurgent microprocessor play AMD from 2-Equal weight to 1-Overweight. While we recognize that seasonally improving demand trends in the MPU sector may continue to be impacted by the overhang of excess Intel inventory, and competitive pressures are becoming more challenging for AMD with Intel's impressive new Woodcrest, Conroe and Merom products, our checks suggest that AMD is continuing to gain orders and market share from key OEMs at a rate ahead of our prior estimates. We look for further confirmation on deepening AMD ties with DELL today at its Technology Day in New York. We acknowledge that capacity constraints are limiting upside, but our higher end estimates are nonetheless increasing for 4Q06 and CY07. While the shares have already moved upwards, given our belief that the shift in unit market share may continue over the next several quarters, we expect AMD to Outperform Intel on a relative basis over the next several months. We are moving our rating to reflect this trend.
Key Themes Include the Following:
1. Incremental Orders From OEM Partners Despite Intel's New Offerings; While Intel appears to have reasserted its technical leadership with its new offerings of Woodcrest in Servers, Conroe in desktops and extended its lead with Merom in Notebooks, we believe AMD's compelling price performance metrics (AMD's overall ASPs are at $94 vs $125 in 2Q06 for Intel with an estimated $72 vs $106 in desktop) combined with more dependable execution, the steady expansion of capacity and improved brand recognition and market acceptance have helped generate incremental order strength ahead of our initial estimates. We believe additional order flow is emerging from key OEM relationships with Dell, Lenovo and IBM as well as HP, Acer and Fujitsu and potentially Toshiba for notebooks. We believe that AMD's share in the overall MPU market could now move from 23% in 2Q06 towards 26% in CY07 vs our prior estimate of 24%.
2. Capacity Constraints To Limit Upside Near-Term, But Expect Steady Progress; We recognize that near term upside to our estimates is being constrained by AMD's capacity problems as the dual core offerings eat up incremental wafer inches. We believe, however, that AMD should show some progress with its capacity limitations over the next several quarters. We believe the trade off between higher ASPs on dual core balanced by lower capacity has been a stalemate to date as it relates to incremental revenue. The shift to 65nm and the extension of relationships with Chartered (as well as TSMC and UMC via ATI) should help address this issue. AMD expects to reach 100% 65nm production at its new Fab 36 by mid 07. We are adjusting our 4Q06 AMD unit estimate from 13.6M to over 15.8M with CY07 moving from 62M to 71M as DELL kicks in across desktops and notebooks.
3. Market Conditions May Be Showing Seasonal Improvement After Weak 1H06 (see Note from Alex Yang on Taiwan PC Trends);
Modest Vista Expectations; With respect to the overall MPU market, after a grueling 1H06, our checks and updates from our colleagues in Taiwan suggest that post the Intel Price cuts in July, the market has seen some more seasonal improvement. According to our colleagues in Taiwan, while Intel's excess inventory remains an overhang, the data for both notebooks and desktops has shown some more constructive indications although visibility on sell thru is limited. For motherboards, our colleagues in Taiwan look for around 18% growth in 3Q06 and 19% growth in 4Q06. In notebooks, we look for around 22% market growth in 3Q06 and 20% in 4Q06 (With respect to AMD our colleagues in Taiwan continue to hear channel updates that Dell could order up to 1 to 2 million MPU units with AMD for 4Q06 and as much as 20 Million in CY07 including up to 4M in notebooks - our estimates are clearly much more conservative.) Our U.S.-based PC colleague Harry Blount continues to look for overall growth of around 8 to 9% in units year-over-year, and around 10% in CY07. We retain relatively modest expectations with respect to impact of the delayed Vista upgrade cycle in 2007.
4. Solid Technical Roadmap at AMD Is Prompting Sustained demand for Opteron processors; While Intel's power/performance metrics have significantly improved with the delivery of Woodcrest and may have placed Intel in a leadership position after lagging Opteron, we believe that AMD has continued to impress OEM partners with its roadmap. Beyond the Opteron Rev F offering, AMD is targeting quad core processors using monolithic (or “native”) packaging technology by August 2007. Importantly, we note that monolithic packing may enable better performance while using slightly less power due to the structural composition of the processor (native quad-core chip rather than the two dual-core chips [i.e., multichip packaging] that will be used with Intel’s initial quad-core offerings), providing AMD with a competitive advantage. This technology is part of AMD’s planned transition to its next-generation microarchitecture (codenamed K10 or K8L) slatted for release in August 2007, which we believe is the impetus for the company’s optimism for further market share gains in desktops, notebooks, and servers in 2007.
5. Long-term strategic benefits from ATI acquisition; One of the key benefits of this acquisition, we believe, rests with the longer-term strategic initiatives AMD could implement regarding potential platforms and integrated solutions. That is, once the deal is completed, AMD plans to integrate ATI’s chipset and graphics functionality and will have access to the manufacture, design, and direction of ATI’s chipsets and graphics groups, enabling additional optimization for its existing processors. This strategy of providing an “all in one” processor follows the path of Intel’s Centrino platform approach, and should provide OEMs with a formidable alternative to Intel’s “all in one” (i.e., Centrino and recently launched vPro) Core 2 Duo products based on the recently launched vPro platform. Yokohama, which represents AMD’s first platformed approach, will incorporate ATI’s power optimized notebook chipsets and graphics with AMD’s Turion 64 X2 processors, similar to Intel’s Centrino-based products. We believe this will provide AMD with “in-house” manufacturing and design capabilities strengthening its overall notebook offering, enabling meaningful market share gains in the OEM channel beginning in 2007.
6. Our CY06 and CY07 Estimates Adjusted Upwards; Given our assumption for incremental server, desktop and notebook unit share in 4Q06, we are adjusting up our 4Q06 EPS (including options) estimate from $0.34 to $0.35, EPS (excluding options) increases to $0.39 from $0.38 and revenues are $1.42B from $1.39B. Our CY07 estimates are raised on our assumption for incremental business exiting 2006 and sustained traction in desktops, notebooks, and servers with sales up but GM trimmed on lowering ASPs due to potential pricing pressure and lower-margin business into Dell. CY07 EPS (inc options) increase to $1.39 from to $1.32 and EPS (ex EQUITY RESEARCH 3 options) is now $1.54 from $1.47 and revenues are $6.05B from $5.7B. Our 4Q06 unit ests edge from 13.5 million to 15.8 million units with CY07 moving from 62 million to approx 71 million units.
7. Valuation May Move Upwards With Increasing Share; Given the possibility for share gains in all three processor segments, and sustained momentum into the OEM channel despite Intel’s product cycle refresh, we suspect that AMD’s forward P/E multiple may improve over the coming months, as these incremental share gains are not fully reflected in AMD’s valuation. At current levels, we believe AMD’s shares are attractive, trading at 16.9x our new 2007 EPS estimate of $1.54, which is below the historical forward P/E average of ~23x. We raise our PT to $29 or 19x our new CY07 EPS (ex option) of $1.54 or 21x our CY07 EPS (inc option) of $1.39.
Smallpops |
