AMD: Fighting for the Silicon Crown

Semiconductor manufacturer Advanced Micro Devices (NASDAQ: AMD) is finally receiving the fruits of its labor.

The CPU revitalization headed by CEO Lisa Su was the turning point where AMD not only caught up to Intel (NASDAQ: INTC), but surpassed it in many performance metrics for both desktop and data center hardware, and gained significant market share.

AMD has continuously beat market expectations when it comes to product expectations as well as financial expectations. Investors are questioning if AMD is now overvalued due to the strong run up of around 50% since the start of the year, and whether it can continue high growth in both the performance of its products, and financially, to justify the heightened valuation.

Despite the high price I am still bullish, due to my expectations of superior or competitive products.

Competitive Landscape

Market share for AMD has increased to 24.6% of x86 processors, which is just under the 2006 all-time high of 25.3%. The Steam hardware survey is showing growth as well in CPUs up to 31.7% from 23.3% in June 2020, while GPUs have slightly decreased to 15.4% in November 2021, from 16.2% June 2020 (GPU share also includes integrated graphics).

This market share mimics the performance of silicon, where AMD has surpassed Intel in many ways. On the other hand, AMD has become more competitive, but it is still not able to take the crown from Nvidia (NASDAQ: NVDA).

The GPU segment isn’t looking as bright, however bulls can hope the upcoming RDNA 3 (Radeon 7000 series) in the latter half of 2022 closes some of the gap. GPU prices in the last year have been volatile, with MSRP thrown out the window, so AMD has the opportunity to compete in the upcoming releases without the need to cut margins down to nothing.

Demand will substantially drop if Ether mining gets dropped for proof-of-stake, which is scheduled for June 2022 currently. When POS is enabled, a surplus of mining GPUs will hit the market in a similar manner to the 2018 GPU markets after the Ether price collapsed.

Growing Data Center 

The Data Center side is a similar story to personal computers, but has been significantly more one-sided to Intel in market-share in recent history.

The longer upgrade cycles of servers of three to five years will have delayed the market share impact compared to the PC segment. Omdia reported in September 2021 that AMD market share of servers has hit 16%, from lows of around 1% during the years leading up to Epyc’s release.  

The Data Center segment has a higher operating margin at 25% compared to 22.6% in Personal Computing over the last nine months, over the same period in 2020 operating margin for Enterprise Solutions was only 7.23%.

Revenue and operating profit have increased by 137% and 722% for the nine months ending respectively for the segments, illustrating the enormous growth once again.

Adaptive Data Center 

Xilinx is a semiconductor manufacturer specializing in FPGA (Field-programmable gate array), SOC (System on a Chip), and recently ACAP (Adaptive Compute Acceleration Platform) manufacturing.

AMD announced in October 2020 that it is to acquire Xilinx through a share swap. The share swap will result in AMD being owned 74% by current owners and 26% by Xilinx owners.

The merger is currently favored to go through, unless the escalating U.S.-China silicon wars result in a blocking of the transaction. Operationally, Xilinx complements AMD in furthering it’s High Performance Computing segment. AMD expects to create $300 million of operational synergies within 18 months of the merger.

Supply Constraints

AMD is currently dependent on TSMC foundries, whose capacity is highly sought after, exacerbated by the global chip shortage.

During the Q3 earnings call, Lisa Su stated, “We have brought on a tremendous amount of additional supply,” and noted throughout the call increased supply is the reason why Q3 exceeded expectations, as well as why Q4 guidance is higher.

Even with the supply constraints, gross margin improved to 48% from 43.6% year-over-year. So, although supply constraints are a real concern, AMD’s management is pushing through.

The Intel Threat

Perpetual competitor Intel can significantly threaten potential growth, particularly in the Intel stronghold of the OEM segment of PCs.

It is no secret OEMs have a history favoring Intel due to market share or due to kickbacks which have created a slew of lawsuits. Intel discrete GPUs are set to be released in early 2022.

The short-term effect most likely will just quell some of the excess GPU demand, but long-term, Intel’s discrete GPUs will most likely take a chunk out of both AMD and Nvidia’s potential revenue. 

Intel’s dormancy of the last few years seems to have come to an end with competitive CPUs and an entrance into the GPU market, overall becoming more threatening against AMD growth.

On The Street

Wall Street is slanted towards the upside with 14 Buy ratings and nine Hold ratings, for a Moderate Buy consensus. However, the average AMD price target of $143.15 implies 3.5% downside potential. Analyst price targets range from a low of $115 to a high of $180.

Despite a seemingly high P/E of 42.6, Nvidia has a substantially higher P/E at 93.1, displaying there can still be market appetite for the industry at these prices.

Conclusion

Operationally, AMD is successful, and is set to have continued growth due to internal improvements, and improving external conditions.

The likely acquisition of Xilinx shows AMD is not twiddling its thumbs, and is continuing to pursue greater market share in high-margin segments.

Disclosure: At the time of publication, Brett Rodway did not have a position in any of the securities mentioned in this article.