May 21, 2021
[14 min Read]
This research comes from my investment blog (http://tedinvests.com/posts/).
Advanced Micro Devices, Inc. (AMD) is a global semiconductor company that's been around since 1969 and they make some of the most powerful processors and power devices out on the market. This company has two segments which include computing & graphics as well as Enterprise, embedded, and semi-custom. The computing & graphics segment includes desktop and notebook processors and chipsets, discrete and integrated graphics processing units, data center and professional GPU's (graphics processing units), and development services. The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, semi-custom System-on-Chip products, development services and technology for consoles. Simply put, AMD primarily serves the microprocessor and graphic processor markets for PC's, notebooks, servers, and more. A Microprocessor refers to the central processing unit (aka the brain) behind a computer. A microprocessor is the most important part of a computer and is what delivers the power and performance behind what you see. AMD's customers include original equipment manufacturers (OEMs), original design manufacturers (ODMs), individuals building PC's, game console manufacturers, and server manufacturers such as IBM and HP. OEMs are organizations that make devices from component parts bought from other companies. For example, the Apple iPhone was invented and designed by Apple, but was licensed out to Foxconn to produce. ODMs (also referred to as “private labeling”) are companies that take already existing product designs from other companies but then make a few small changes and sell it under their own brand. For example, Compal Electronics (a Taiwanese ODM) manufactures monitors, tablets, televisions, etc. and sells them to companies such as Dell, Apple, Toshiba, etc.
While this business is quite difficult to understand for people who can't wrap their head around the semiconductor industry, it is not difficult to realize that computers have been heavily integrated into society. Learning about this stock has been a learning curve for me, but I've gotten a better understanding of this stock after diving into their financial reports and presentations. What I find makes this company interesting besides their serious dedication to making high end processors, is the story behind their success. Just a few years back this company was in serious trouble, but Lisa Su has managed to really turn around the business since 2014. Around the time that Su took over as CEO, this stock was trading in the $4 range. Today, this stock is trading above $70 a share and has managed to capture the attention of millions around the world. The following video further explains AMD's business model and story.
Total Addressable Market (TAM)
The global semiconductor market was valued at $513.08 billion in 2019 and is projected to reach $726.73 billion by 2027. That level of growth represents a 4.7% compounded annual growth rate during the forecasted period. This growth is largely attributable to the rate at which consumers are buying electronic devices. More recently, we're starting to see the emergence of Artificial intelligence (AI), Internet of Things (IoT), and machine learning (ML) technologies start to drive this market. Moreso, the increase in faster and more advanced memory chips will be driving this market. According to the International Data Corporation, there was a 6% drop in revenue within the industry in 2020. However, growth rates for the semiconductor market are expected to continue an upward trend in the future. Also, the Covid pandemic accelerated the work from home movement which means that companies will need more chips in order to store all the data and workers will need newer advanced devices to keep up to date with the level of processing that their jobs require. Some of the largest companies in this space are Nvidia (NVDA), Intel (INTC), and Micron Technology with market caps of over $350, $220, and $90 billion respectively.
First Quarter 2021 Financial Results
Quarterly Financial Segment Summary
“For the full year 2021, AMD now expects revenue growth of approximately 50 percent over 2020 driven by
growth in all businesses, up from prior guidance of approximately 37 percent annual growth.”
Important Points to Address
“Against the backdrop of strong overall PC demand, our revenue is growing significantly faster than the market, particularly in the ultrathin, gaming, and commercial segments. As a result, we believe we gained client processor revenue share in the quarter… In notebooks, we delivered our sixth straight quarter of record mobile processor revenue”
“We are making great progress on our data center GPU road maps and expect revenue to grow in the second half of the year as we begin the production ramp of our next-generation AMD Instinct GPU to support multiple HPC wins including Frontier, the first U.S. exascale supercomputer.”
“For the enterprise, Cisco, Dell, HP Enterprise, Lenovo, and Supermicro all announced plans to expand their AMD-based offerings with more than 100 new third-gen EPYC processor-powered server platforms that deliver superior performance and total cost of ownership.”
AMD Acquisition of Xilinx Approved by Holders (April 7, 2021) - Back in October of 2020, AMD said that they were to acquire the No. 1 provider of adaptive computing solutions, Xilinx (NASDAQ: XLNX). Xilinx has over 60,000 customers, 4,400 patents, and a market cap of $29 billion. Last month, this merger was approved by the shareholders of both chipmakers. AMD stated that, “the acquisition will bring together two industry leaders with complementary product portfolios and customers, combining CPUs, GPUs, FPGAs, Adaptive SoCs and deep software expertise to enable leadership in computing platforms for cloud, edge and end devices.” Thus, AMD is in a better position to capitalize on some of the industry's fastest growing segments such as data centers, gaming, PCs, communications, automotive, aerospace and defense. AMD will pay 1.7234 shares for each Xilinx share and The deal is set to close by the end of 2021 and requires regulatory approvals.
AMD EPYC 7003 Series CPUs Set New Standard as Highest Performance Server Processor (March 15, 2021) - AMD announced that the their EPYC 7003 series processors extended AMDs per-socket and per-core performance. This series includes the AMD EPYC 7763 which is the world's highest performance server processor. These processors provide up to two times better performance in high-performance computing (HPC), cloud, and enterprise workloads compared to their competition. A number of AMD's cloud partners announced offerings based on the new EPYC 7003 series processors. These partners include the likes of Microsoft Azure, Oracle cloud infrastructure, Tencent Cloud instances, Amazon Web Services (AWS), and Google Cloud. Multiple server providers announced that they would launch new platforms powered by AMD's chips such as Cisco UCS rack server models, Dell Technologies PowerEdge servers, Lenovo ThinkSystems servers, and more.
AMD customers increase usage of chips in new notebooks - In AMD's Q1 2021 financial results, AMD announced that a number of their customers are increasing their usage of AMD Ryzen 5000 Series Mobile Processors and AMD Ryzen PRO 5000 Series Mobile Processors by 50 percent compared to the prior generation. Acer introduced their new Nitro 5 and Aspire family of notebooks which will be powered by the Ryzen 3000 C-Series processors which are the first Ryzen processors designed for Chrome OS. Asus announced the release of new AMD-powered gaming notebooks and notebooks for consumers which include the new ZenBook, Chromebook Flip, and VivoBook systems. HP's latest lineup of business notebooks feature both Ryzen Mobile and Ryxen PRO Mobile 5000 Series Processors. Lenevo introduced twelve new notebooks (powered by AMD chips which are in their ThinkBook models for commercial users), Legion and IdeaPad gaming and Yoga notebooks.
Development not noted in detail - AMD announced the Radeon RX 6700 XT GPU which delivers a 1440p PC gaming experiences.
President and CEO - Dr. Lisa Su
Dr. Su has been the President and CEO of AMD since October 2014. From July 2014 to October 2014, Dr. Su served as the Chief Operating Officer of AMD and was responsible for integrating their business units, sales, global operations and infrastructure enablement teams into a single team responsible for all aspects of product strategy and execution. She joined the AMD team back in 2012 as Senior Vice President and General Manager of global business units and was responsible for driving business execution of AMD's products and solutions. Prior to joining AMD, Dr. Su served as Senior Vice President and General Manager at Freescale Semiconductor, Inc. for 7 years. At Freescale, Dr. Su was responsible for the company's embedded communications and applications processor business. The previous 13 years, she spent 13 years at IBM where she served in various engineering and leadership positions including VP of the Semiconductor Research and Development Center. In addition to her previous work at IBM and Freescale, Dr. Su also worked at Texas Instruments Inc. Dr. Su has a number of awards and accolades including 2020 Fortune Business Person of The Year (Ranked #2), 2020 Semiconductor Industry Association (SIA) Robert N. Noyce Award, 2019 World's Best CEOs of 2019 (Barron's), and many more. Considering Dr. Su's extensive list of roles in various semiconductor companies, awards, and accolades, I believe she will continue to lead this company to be one of the leading semiconductor companies for years to come.
Chief Technology Officer and Executive Vice President - Mark Papermaster
Mark Papermaster is the Chief Technology Officer and Executive Vice President at AMD and is responsible for corporate technical direction, product development including system-on-chip (SOC) methodology, microprocessor design, I/O and memory and advanced research. He boasts over 35 years of engineering experience and prior to joining AMD in 2011 he was the leader of Cisco's Silicon Engineering Group. Mark also served as Apple's Senior Vice President of Devices Hardware engineering where he developed the hardware for the iPod and iPhone. Prior to his role at Apple, he served in a number of leadership positions at IBM where he looked after the development of the company's key microprocessor and server technologies. Mark's experience shows me that he understands the competition that he is up against and the market with which his company operates in.
Executive Vice President - Rick Bergman
Rick Bergman is the Executive Vice President of Computing and Graphics at AMD and has over 30 years of industry experience. Prior to his role at AMD, Bergman was president and CEO for Synaptics (NASDAQ: SYNA). Synaptics is a developer of human interface hardware and software including touchpads for laptops, fingerprint biometrics technology for smartphones, and more. Prior to his role at Synaptics, Rick served in a series of senior executive positions at AMD including senior vice president and general manager of AMD's Product Group from May 2009 to September 2011, and senior vice president and general manager of AMD's Graphics Product Group from October 2006 to May 2009. Additionally, he held senior management positions at S3 Graphics, Texas Instruments and IBM.
Management team not mentioned in-depth - Darren Grasby (Chief Sales Officer), Devinder Kumar (CFO and Treasurer), Mark Fuselier (VP of Technology and Product Engineering), and more.
What could go wrong
AMD's biggest customers produce their own chips - Microsoft, Amazon, and Google are on the hunt to cut costs and improve performance by producing their own chips. These three tech giants are specifically interested in developing their own chips in the areas of cloud-computing and artificial intelligence. Certainly these giants have the resources to do so and AMD is at risk to lose some of their business. As a result of this news, AMD and the other chip manufacturers are being pushed to develop more custom chips for their customers. Thus, we could potentially see this company's R&D costs substantially increase in the future. While we don't exactly know what percentage of AMD's revenue these three giants make up, AMD stated in their 10-Q that no single customer made up more than 10% of their revenue. Although, AMD stated in their most recent 10-K that, “If we lose Microsoft Corporation's support for our products… our ability to sell our products could be materially adversely affected.” We'll have to see what happens in the future, but this news is certainly something to worry about.
Intel's business is picking up again - In the past few years Intel wasn't able to hold their ground too well for various reasons such as quality issues, delays, and drama in the executive suite. Although, it seems that Intel's business is starting to pick up as their revenue is starting to trend upward once again rather than sidetrack. Their market cap is sitting at over $220 billion while AMD's market cap is less than half of Intels at just above $90 Billion. Although, I'm confident that AMD will still continue to grow their business at a rapid pace and be a major competitive threat to Intel especially knowing they raised their revenue guidance from up 37% to up 50% from the prior year. That raise in guidance is not something to be taken lightly from the viewpoint of Intel.
What we want to see in the future
AMD relies less on third parties to manufacture their chips - On AMD's 10-Q they stated that, “We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.” It has been noted that U.S tech firms rely on Taiwanese contract manufacturers to produce up to 90% of their chips and Asian countries produce more than 70% of global semiconductors. Thus, it isn't only AMD with this manufacturing problem. Nonetheless, we want to see AMD start to produce their chips in house in order to cut costs. Surely the $3.12 billion of cash that they ended this past quarter with could be put to good use for this cause. However, we don't know how long it will take for this to start happening and as for right now Asian countries will continue to produce the strong majority of chips.
The aggregation of the following data brings me to the conclusion that AMD is in a strong position to capitalize on market trends. With the semiconductor industry growing at a CAGR of 4.7% and consumers' appetite for electronics not stopping anytime soon, I believe we will see consistent growth in AMD's business. Dr. Lisa Su has a phenomenal track record of leadership and has managed to turn this business from one that was soon to be bankrupt to one that is thriving. The fact that they raised their guidance gives me confidence that the management team at AMD will continue to execute on their goals for long term growth of providing industry-leading chips. With that being said, AMD still faces significant competition from the likes of Nvidia, Intel, and more. Also, the fact that AMD is outsourcing much of its manufacturing to Asian countries represents a challenge that investors will want to see change in the following decade. While I don't currently have a position in AMD, if this stock were to fall to below $70 I would consider starting a position. If the stock were to fall under $65 I would start adding much more aggressively. While this company is still in its high-growth phase and not necessarily the safest stock, I wouldn't mind this stock being no more than 15% of my portfolio if it were to drop to the levels I outlined considering my risk tolerance and time horizon.
Things to look into to get a better understanding of this company: