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Shares of AMD received a boost today after an analyst at Jeffries upgraded the company's stock on a positive market outlook for its upcoming server and enterprise-focused Rome chips.
AMD (NASDAQ:AMD) is fresh off from reporting its earnings for the second quarter and the results were more-or-less in line with expectations, albeit the outlook for the remainder of the year raised some questions. Dr. Lisa Su cut the forecast for the third quarter, yet kept its full-year guidance at the same level which heavily implies a very strong fourth-quarter. Many analysts asked questions concerned with the firm's ability to deliver on a strong holiday quarter.
As of this writing AMD is hosting its EPYC Rome launch party where it is trotting out its latest and greatest server chips based on the Zen 2 microarchitecture which also happen to be crafted on TSMC's (NASDAQ:TSM) 7nm process. The Palo Alto-based firm is claiming significant cost and performance advantages over rival Intel's (NASDAQ:INTC) existing 14nm Xeon processors.
At this point, it's known by everyone from enthusiasts, journalists, and investors that AMD's ultimate fortunes rest heavily on the back of EPYC's market traction inside the data center. Back in 2016 its slice of the pie when it came to the overall server market, consisting of systems powering deep-learning, enterprise applications, cloud infrastructure, and everything in between, had fallen to practically zero before it eventually launched first-generation EPYC parts in 2017.
Fast forward to 2019 now it seems to be gaining steam at a consistent pace in terms of convincing partners to develop and validate systems based on its EPYC product stack.
AMD tripled it server market share Q1'18 to Q2'19 - analysts calls for another tripling in the next year
Enough steam, in fact, to persuade analysts at Jeffries to issue notes to investors calling for a "buy" rating on AMD stock with a price target of $40, good for a 33 percent upside as of today's closing price of $29 and change. As detailed in the chart above, AMD has achieved around 3 percent of the server X86 market. As discussed in our earnings coverage, AMD is definitely beginning to see some actual revenue and ASP improvements in its enterprise segment thanks to growing EPYC sales.
However, that simply isn't enough to justify AMD's current price to earnings ratio of over 126. AMD needs to improve its earnings and the way to do that is by increasing market share while improving margins. Its margins are finally right around the 41 percent mark, way up from 34 percent in 2017 and so now it just needs revenue to drive earnings. Once it can do that its P:E ratio will fall down to realistic levels for the semiconductor industry.
Wall Street expects real growth and EPYC Rome is designed to deliver that very thing. Jeffries made a bold statement today with their price target upgrade: AMD will gain an additional 10 percent server revenue over the next 12-18 months. If it can achieve this, its revenue will soar and we have to think margins will improve further as EPYC dies are essentially using the same chips used in much lower-priced Ryzens.
Interestingly Mercury Research, which is the gold standard for CPU market share data, is set to release its next quarterly market study on August 22nd, just 15 days from now. We should have a better understanding of how far 14nm EPYC was able to take AMD in two years, and a good idea of what is needed to drive an additional 10 percent market share gain.