Former AMD CEO Might Have Been Right to Disregard Mobile Device Opportunities
AMD (NYSE:AMD) competes with Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) in the microprocessor and graphics markets. The company has remained under Intel’s shadow in the microprocessor market since its formation – we estimate a 2010 market share of 20% for AMD vs. 80% for Intel. [1]
Our price estimate for AMD stands at $7.73, which is about 8% below market price.
The recent change in AMD’s management is a key development for the company’s outlook. AMD’s CEO Dirk Meyer announced his resignation due to clashes with the board of directors over the company’s strategy. The company is reportedly interested in a CEO with a different vision for the business as it looks to tap the growing demand for mobile devices. AMD’s recent struggles to gain share from Intel in core segments are also likely to have played a role in the management change. [2]
AMD’s ex-CEO previously stated that, despite the vast market for mobile devices, the actual revenue opportunities remain limited compared to the company’s core segments like PCs. Clearly the board of directors thinks differently. Here we pose a question. Was Dirk Meyer right in his statement?
Is the Mobile Market Worth Pursuing for AMD?
In recent years, the mobile market has exploded with a variety of smartphones (and now tablet computers) making their way into consumers’ hands. Several studies suggest that the mobile market will continue its rapid growth pace. Market research firm Gartner estimates that total tablet sales for 2010 will fall just under 20 million, but expects this number to nearly triple (to 55 million) in 2011. [3] Does this big market mean big bucks?
Let’s take a look at Intel’s strategy with its Atom processors, as it tries to expand its functionality beyond netbooks and into smartphones and tablets. Despite a large addressable market for Intel’s Atom processor, its business value to Intel is actually quite low. These operations constitute less than 2% of Intel’s stock value, by our estimates, amounting to a total value just shy of $2.5 billion.
This is a result of lower processor pricing as well as Intel’s low market share in this segment. We estimate that Intel maintains a market share of close to 13% in this segment compared to 80% in microprocessors for PCs (notebooks, desktops and servers). Competition in this market is fierce due to the presence of established players like Qualcomm, Texas Instruments and Broadcom.
Given that the mobile market is a very small value contributor to Intel and the microprocessor giant is finding it difficult to gain share, should AMD really divert some of its resources to pursue this crowded space? AMD still has plenty of room to gain share in core microprocessor segments, and might be better off committing its resources there.
Plenty of Room to Run in Core Segments
With the exception of the desktop market, where AMD has close to 27% share, the company has seen significant declines in its notebook and server processor market shares. AMD has an estimated 13% market share in notebooks; for servers, this number is about 8%. In the case of servers, Intel has gained ground with its Xeon processors while AMD hasn’t done itself any favors with product delays magnifying the loss.
We’ve previously discussed AMD’s upside opportunity in server processor market share (Can AMD Take Back Server Processor Share from Intel?). Given significant room for growth in both servers and notebooks, maybe it makes sense for AMD to focus on these markets before venturing into microprocessors, particularly at a time when competitor Nvidia is jumping into the fight for microprocessor share.
Maybe AMD’s management shakeup was the right move in the sense that the company had struggled to gain share in core segments. But given our analysis, it seems that former CEO Dirk Meyer may have been right in his assertion that the mobile market might not present the most lucrative opportunities for AMD.
Did AMD make the right move? Let us know your thoughts by providing feedback in the comment box below. You can also drag the trend lines in the charts above to see the impact of various notebook and server market share scenarios on AMD’s stock value.
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Notes:- Calculated based on our share expectations in notebook, desktop and servers [↩]
- AMD Seeks New CEO Who Can Challenge Intel, Tackle Tablet-Computer Market, Bloomberg, Jan 12 2011 [↩]
- Predicts 2011-Government CIOs Must Balance Cost Containment With IT Innovation, gartner.com, 17 Nov 2010 [↩]