AMD: Leading The Data Center Market
AMD could sustain Data Center growth due to its architecture lead over Intel. See why AMD is a buy amidst the shifting geopolitical landscape and Chip Wars.
AMD: Leading The Data Center Market
Summary
- AMD could sustain Data Center growth due to its architecture lead over Intel.
- The company's shifting mix toward higher-margin Data Center and Embedded segments will also boost operating-profit growth.
- AMD’s EPYC could capture cloud share faster than Intel through 2025.
- AMD is a buy amidst the shifting geopolitical landscape and Chip Wars.
- We're about to raise prices at my private investing ideas service, Yiazou Capital Research, where members get access to portfolios, market alerts, real-time chat, and more. Learn More »
Investment Thesis
Advanced Micro Devices, Inc. (NASDAQ:AMD) has substantially underperformed the iShares Semiconductor ETF (SOXX) index. However, its improving growth prospects, revenue mix, growing Data-Center market share, and attractive valuation make AMD a buy amidst the global Chip Wars and for the long term.
Improved Positioning In The Data-Center Market
AMD's technology portfolio and focus on increasingly modular and interconnected chips have aided its positioning in the data-center market. As a result, AMD's data center continues to post strong growth, with revenue up 45% YoY in Q3 2022 to $1.6 billion from $1.1 billion in Q3 2021.
Performance superiority is a consistent theme across AMD's data-center products. This makes it among the top hyperscale cloud providers, significantly contributing to its revenue. This segment is also lucrative from a gross margin perspective. Moreover, AMD's extension of its portfolio across single and dual-socket CPUs to address a variety of server workloads will help expand its reach and lift pricing.
AMD is well-positioned to keep expanding data-center share as it widens the range of workloads, particularly for artificial intelligence training and inference. AMD's chiplet architecture for connecting different computing units enables it to configure chips in a highly tailored manner, especially for high-end customized workloads. As a result, even with a likely slowdown in hyperscalers' capital spending, AMD could sustain data-center growth of more than 25-30% due to its architecture lead over Intel Corporation (INTC), reflected in superior chip performance and higher average selling prices.
The company has also announced that it will infuse its CPU portfolio with Xilinx's FPGA-powered AI inference engine, with the first products slated to arrive in 2023. As a result, AMD could nearly double its market share in data centers to around 40% through 2025, driven by its lead in chiplet and performance improvement for custom workloads due to the addition of Xilinx and Pensando accelerators.
Client CPU Share Can Remain Steady Despite Weakening PC TAM
Client (desktop/notebook CPU) sales saw a significant reset in Q3 2022, declining 53% QoQ, driven by a weaker-than-expected PC market compounded by ongoing inventory burn across the PC supply chain. The management expects PC industry units to be down high-teens to 20% this year compared to its prior expectation for a mid-teens % decrease followed by a ~10% decline in 2023 as the supply chain continues to adjust inventories down for at least the next 2-3 quarters. The team is significantly under-shipping to PC consumption to help flush channel inventories, which should support Client revenues to inflect to the upside in 2H23.
Revenue Mix Shift & Chip Performance Improvements Lift Margins
AMD's rising chip performance per watt, driven by the use of leading-edge process nodes from Taiwan Semiconductor Manufacturing Company Limited (TSM), and the infusion of accelerators with its chiplet architecture, may support the firm to sustain top-line growth faster than the overall market.
AMD's sales growth is fueled by high-performance products and continuous increases in chip performance per watt ahead of rivals, notably Intel. As a result, AMD could exceed its long-term 20% sales-growth target rate, with estimates have come down sharply for 2023 following its inventory correction tied to the Client segment.
The company's strong road map for custom workloads in data centers and diversification into other markets, such as networking, should support the company in sustaining top-line gains faster than the semiconductor market. Thus, the company's shifting mix toward higher-margin Data centers and Embedded segments will boost operating profit growth faster than the top line.
Genoa: EPYC 4th Gen Is A Game Changer
AMD delivered yet another impressive family of server CPU products, helping to extend and solidify its server CPU product leadership compared to INTC, which continues to recover from past missteps. In addition, AMD's 4th gen server processors (codenamed Genoa) offer significant improvements compared to both AMD's prior Gen of products and INTC's existing Ice Lake products.
Though AMD could not compare performance with INTC's Sapphire Rapids (which still needs to ramp in volume), Genoa rumors to be superior. Notably, at up to 96 cores, AMD broadened its suite of offerings in this generation to meet a more diverse set of customer needs, with different SKUs optimizing for density, cache, frequency, cost, etc. In addition, the launch included endorsements from key data center ecosystem players in both Cloud (Google, Microsoft Azure, Oracle) and Enterprise/HPC (Dell, HPE, Lenovo, Supermicro, VMware).
From a performance standpoint, AMD's Genoa is estimated to generate a gen-to-gen ~2.6x efficiency improvement for Cloud workloads, a ~2.5x improvement in floating point ops performance for HPC, and a ~2.9x improvement in performance for Enterprise workloads, with improvement on a performance-per-watt basis across all three segments as well. AMD also highlighted the EPYC family of processors has now achieved over 300 world records, up from 200 since the launch of Milan.
Finally, Intel may begin shipping its 7-nm chips after production delays in 2023. AMD's EPYC server CPUs, now on third-generation 7-nm chips, are set to shift to 5-nm, maintaining an advantage over Intel. In addition, the 5-nm chips aid performance, shrink price premiums and reduce costs. Thus, Amazon, Google, and Microsoft could move more workloads to AMD servers through 2023.
New GPU Launch Could Stimulate Demand
AMD's 7900 XTX/XT RDNA3 was launched on December 13 at $999/$899 and is competing with the more expensive NVIDIA Corporation (NVDA)'s RTX 4080 (~$1200 MSRP), while the RTX 4070 Ti, the rebranded RTX 4080 12GB (originally $899), could release in January as both NVIDIA and AMD look to expand their mass-market in GPUs into 2023.
AMD's RX 7900 XTX delivers a comparable gaming performance to the NVDIA's RTX 4080. Still, the $200 difference in pricing would be the key differentiating factor for AMD's newly launched GPU as gamers make a purchase decision in an economy where discretionary spending is dwindling. In addition, other mass-market versions at lower prices in 2023 could help drive demand in the next few quarters.
Client Weakness Favors Valuation
AMD's price/earnings multiple has come down sharply after the estimates' slowdown for sales and profit growth amid an inventory correction in its client segment. Yet, the market could be under-assessing resilience in the Data Center business and overstating the possibilities for expansion by Intel. In addition, AMD's server growth can aid sales mix and margins, as Intel's server-share loss and foundry expansion hurt the chipmaker's margins.
In addition, AMD's transition to the 5-nm process aids its cost profile, and its chip-performance advantage is helping close the gap with Intel on pricing. As AMD builds its Data Center portfolio with the recent acquisitions of Xilinx and Pensando, Intel risks losing market share across multiple workloads.
Conclusion
Despite growing macro headwinds buffeting the PC market compounded by continued inventory work-downs across the PC supply chain, AMD's Data center and Embedded businesses remain relatively strong heading into 2023 on a resilient North American cloud environment and continued strength in military, aero, industrial and communications sectors.
Author of Yiazou Capital Research
Unlock your investment potential through deep business analysis.
I am the founder of Yiazou Capital Research, a research platform designed to elevate your due diligence process through in-depth analysis of businesses.
I have previously worked for Deloitte and KPMG in external auditing, internal auditing, and consulting.
I am a Chartered Certified Accountant and an ACCA Global member, and I hold BSc and MSc degrees from leading UK business schools.
In addition to my research platform, I am also the founder of a private business.
This article was written by
I am the founder of Yiazou Capital Research, a stock-market research platform designed to elevate the due diligence process through in-depth analysis of businesses.
I previously worked for Deloitte and KPMG in external & internal auditing and consulting.
I am a Chartered Certified Accountant and a Fellow Member of ACCA Global, and I hold BSc and MSc degrees from leading UK business schools.
In addition to my research platform, I am also the founder of a private business.
My primary strategy focuses on high-quality, free cash flow generative stocks with an above-average growth rate and a strong business moat.
I manage my own highly concentrated portfolio, and I occasionally engage in short-term trades to profit from asset mispricings when Mr. Market does not feel very well.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of INTC, AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Comments (50)
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- AMD RDNA ll stalls in the face of RDNA lll wait and see
- 187 dGPU SKUs, AMD, Intel, Nvidia ranked on channel inventory holding
- Change in channel inventory by SKU on 10.13 to 11.19 to 12.22.22
- By product generation, category, and overall brand market share noted.Mike Bruzzone, Camp Marketing
Standing fanboys in full panic mode
They never say INTC had 99% and lost 17 to 25% and dropped $13 billion in revenue while 100 billion in cost is required for FABS to keep up with the industry
Always taped in taped out and company slides about some future thing.
Merry Xmas anyway INTEL Fanboys the Grinch is coming for INTC next year with a bag of delays.INTC still falling with all your great power point roadmaps not a single tech point has helped the price.
stockcharts.com/...
People don't know what they don't know.
People can only see what they are capable of seeing.
People see what they like or want to see, and likely people enjoy seeing what they prefer seeing.
Enjoy the music for a happy holiday:
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A bag of delays... I love it. Coming Christmas 2022: "Everything is ahead of schedule"Coming Christmas 2023..... "Meteor lake will ramp in 9 months"- - ... but on Intel 7... because it is better than N3"Coming Christmas 2024. "20A and 18A products delayed again... because we are making them super duper awesom-er!"I forgot: Christmas 2023: "Intel posted (-$14Billion) cash flow in 2022. EPS is (-$4.00). Pat has decided to retire to spend more time with Family.... we thank him for creating a money losing, cash burning business... couldn't have done it without his leadership " Lisa Su is begged by Intel board to run both AMD and Intel ..... she states "a trained monkey could do a better job with Intel than past CEO"
H11 (for 1st Gen, 7xx1, SP3 4094 socket) / X11 (for 2nd Gen, 3647 socket), 9/46.
H12 (for 2nd & 3rd Gen, 7xx2 & 7xx3, SP3 4094 socket) / X12 (for 3rd Gen, 4189 socket), 25/34.
H13 (for 4th Gen, 9xx4, SP5 6096 socket) / X13 (for 4th Gen, 4677 socket), 6/na.
9/46 -> 25/34 -> 6/na.
I had the confidence in Lisa Su leading the company and used averaging-down to make $$$ once, and now it's the second chance.
Wish all AMD believers make $$$ from AMD; be patient!www.youtube.com/...
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First, as explained many times, AMD DC growth is not really limited anywhere now. Whether it's core count, frequency across cores, and/or TCO, AMD leads. Genoa's support for bfloat, AVX, and floating point also gives it an AI edge in CPUs that are still the primary chip used for things like inference, even if GPUs are better.
Second, AMDs revenue share of the DC market is 25%, with 100% profit share right now.
Third, AMD is expected to continue it's revenue share tear. AMDs Bergamo will help resist ARM inroads as it is optimized for core count/throughput.
Everyone expects AMD to gain share for the foreseeable future. Charts show DC revenue growth goes nowhere but up. Desktop will return/jump when Intel's dumping in the channel clears some, AMD leads with 3d v-cache models, and mobo costs decline.
" AMDs revenue share of the DC market is 25%" Only in the minds of AMD shareholder and AMD management because they do not count some markets. Everyone else has them at 17%.
" GPUs are better." A market that AMD has clearly failed in. After having nearly 50% market share when they bought ATI it is now down to 8% and falling.
" AMDs Bergamo will help resist ARM inroads as it is optimized for core count/throughput." A product that is due out in 25/26 timeframe good luck with that
I'm just looking at earnings in DC segments.
Not failed. They're behind in software, and they prioritize CPUs. They're still expanding with Instinct.
Bergamo is 1H23.
First, as had been explained many times in other articles AMD growth in the data center is limited to a market that needs high core counts. AMD has no AI.
Second, this strategy has helped AMD gain about 15% market share over 5 years to a total of 17%.
Third, recent estimates for DC for 2023 have AMD around 18% share, ARM around 7% and Intel at 75% down from their current 77% share.
I did not realize that ARM was this high Intel has a game plan for ARM in DC by offering both ARM and RISK V solutions.
Pat G says he expects Intel to lose share for a couple more quarters as Sapphire rapids ramps. In Q2 he expects to start taking back some share. He was right on Desktop and PC as AMD share took a big hit last quarter.
Appreciate the focused and concise piece. Is it plausible, in your opinion, that AMD is gradually pivoting away from consumer markets and deepening its focus on high margin enterprise TAM? Would acquisitions of Xilinx and Pensando give it the foundation to break away from competition in such markets?