Why AMD Is Ripe for a Turnaround in 2018

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Advanced Micro Devices (NASDAQ: AMD) had entered 2017 with terrific momentum thanks to its market share gains against rival NVIDIA, but this has fizzled out as the hype around its Vega graphics cards didn't translate into results. Investors were disappointed as these Vega graphics cards were supposed to help AMD make inroads into the premium desktop market where NVIDIA holds sway.

But when it came to light that AMD's latest GPUs (graphics processing units) are unable to match NVIDIA in terms of performance or value, AMD bulls started feeling uneasy. The unease turned into panic when AMD guided for a 15% sequential drop in fourth-quarter revenue despite news of potential market share gains against Intel (NASDAQ: INTC) in the server chip space.

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The negative sentiment has weighed heavily on AMD shares in recent months, but investors shouldn't lose hope just yet as it could make a big comeback in 2018. Here's why.

Notebooks could give AMD a shot in the arm

A number of OEMs (original equipment manufacturers) have either committed to or have started launching AMD-powered notebooks of late. At the end of October, AMD announced that it will be combining its Ryzen CPUs (central processing units) with the Vega GPU cores in a single platform in a bid to enhance performance while keeping power consumption low.

According to AMD, the combined architecture (known as an APU in AMD speak) could boost the performance of the GPU and the CPU by 128% and 200%, respectively, as compared to the previous generation. What's more, AMD claims that the performance boost has been achieved along with a 58% drop in power consumption.

They can be used to power ultra-thin notebooks where performance needs to be condensed in a compact size without compromising on the battery life. Now, AMD believes that these new APUs can reduce the size of an ultra-thin notebook by as much as 24% despite the bump in performance and lower power consumption.

Not surprisingly, the GPU specialist has already received commitments from the likes of Acer, HP, and, Lenovo, who are expected to launch AMD-powered devices from the first quarter of 2018. Additionally, AMD recently struck a partnership with Intel to manufacture a high-end notebook chip.

AMD will be making a custom GPU chip for Intel, which Chipzilla will combine with its laptop-gaming focused CPU to create an integrated package that can help laptop OEMs save space and accelerate performance. This could allow laptop makers to include a bigger battery, more memory, or reduce the notebook size.

In all, AMD believes that its notebook chips could increase its addressable market by $10 billion. This isn't surprising as there are currently 450 million laptops on the market with an age of more than five years. So, AMD could win big from the upgrade cycle once its laptop OEM partners start launching new devices from 2018.

The server business could hit critical mass

AMD has been taking market share away from Intel in the server chip space and Intel seems to be admitting that it could lose more ground in the server chip market where it holds a market share in excess of 90%.

This doesn't seem very surprising as Intel has been under a lot of pressure in this segment ever since AMD launched its EPYC server chips in mid-2017, promising a strong performance on a budget.

AMD's server chip has gained a lot of traction, with Chinese cloud companies such as Baidu, JD.com, and Alibaba already using the EPYC platform in their datacenters.

For instance, AMD recently announced that Baidu is using the EPYC server processor to provide artificial intelligence (AI)-enabled services to its customers. AMD also mentioned that Baidu is going to expand the deployment of the EPYC processors across its datacenters from the first quarter of the new calendar year.

Additionally, Hewlett-Packard Enterprise recently became the first major server OEM to launch an EPYC-based two-socket server, while Dell also seems to be in the running to deploy its own server based on AMD's platform. Looking ahead, it is likely that more server manufacturers will adopt the EPYC chip given its potential to reduce server operational costs by as much as 50%, as found out by HPE when it deployed the same in its recently launched data center server.

This points toward a substantial long-term growth opportunity for AMD as the global data center server market will be worth $56 billion in 2021, according to TechNavio. AMD doesn't have a significant presence in this market yet. So continued market share gains against Intel will put this business in a higher gear as more data center customers start using the EPYC platform from 2018.

This is why AMD investors shouldn't lose hope after a disappointing end to 2017 as the company is riding on strong catalysts to boost its growth in the New Year.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu, JD.com, and Nvidia. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.