With the publication of Q2’22 results, Advanced Micro Devices, Inc. (NASDAQ: AMD) finally provided a breakdown of product lines to specifically detail data center revenues. Research companies had long detailed estimated earnings for different sectors, but now the market has a clear vision of data center growth and the possibility of taking more market share. My investment thesis remains highly optimistic due to AMD’s ability to make significant gains in both the data center space and the new embedded category acquired from Xilinx.
More sharing wins to come
As the media focuses on the potential monetary benefits for Intel (INTC) of the CHIPS Act, AMD is still poised to steal major market share while the chip giant is busy building new fabs for the next few years. BoA analyst Vivek Arya sees Intel getting $10-15 billion in aid from the US bill alone, with Italy and other European countries lining up for other fabs.
As the U.S. chip giant builds new factories and tries to catch up on chip manufacturing leadership from Taiwan Semiconductor Manufacturing Company Limited (TSM), AMD will sell data center chips. According to the Q2’22 report, Intel still held a major market share in the data center space, selling $4.6 billion worth of chips. The number was down from $5.5 billion in the prior Q2.
The next platform documented the new AMD breakdown provided in this handy business segment chart. The company recorded 83% growth in the data center segment to $1.5 billion in quarterly revenue. The embedded category is almost entirely made up of former Xilinx revenue and reached $1.3 billion.
Based on revenue alone, AMD has a roughly 25% market share of the data center market, with Intel still controlling 75% of the market. Given the trajectory of the 2 companies, AMD controlling the market over the next two years seems likely. In such a scenario, the company would actually be the one bringing in over $4 billion in quarterly data center revenue, with Intel lucky to maintain $1.5 billion per quarter. This equates to a change of more than $10 billion per year in revenue for this category alone.
Even though the Client segment is weak due to lower PC demand and the Gaming segment may be stagnating with a 1% growth forecast, AMD looks set to expand the Embedded division. The old Xilinx-focused business appears to have been underinvested and was very supply constrained prior to the merger, giving the business now under AMD’s best operations a big boost.
During the Q2’22 earnings call, CEO Lisa Su again confirmed that AMD was limited in supply in parts of the business, oddly led by Xilinx’s integrated wallet:
We are still a bit constrained in some parts of the Xilinx portfolio, although we continue to make good progress. And I expect the additional supply to come, especially towards the end of the year and into 2023. Our view of the company, again, is that I think the quality of the design wins, the quality of the overall diversified market is very strong, and so I think if we’re able to continue to ease some of those supply constraints in the second half of the year, I think we’ll see a good growth trajectory for the company.
Many investors feared Xilinx activity could slow the overall AMD growth rate, but details now suggest that Xilinx was reporting disappointing growth due to supply constraints. The bigger company helped get more capacity and orders, but AMD still can’t keep up with the demand.
Cheap at $100
Somehow, the stock traded as high as $71 on fears of a slowdown in chip demand. Analysts only have earnings approaching $5 for 2023, putting AMD at a forward P/E multiple of around 20x.
Our previous research has shown that AMD is on track for EPS of $6+ next year. The main difference is that forecasts call for 20% revenue growth next year to $32 billion, while analyst consensus estimates only see 14% growth to almost $30 billion. dollars in revenue in 2023.
Note that pro forma revenue for the year is targeted at approximately $26.7 billion by adding Xilinx’s $450 million in revenue to the figures for the period prior to the February 14 deal close. Using this number, the analyst’s revenue target amounts to just 11% real growth for the company.
Between the huge opportunity to simply take market share from Intel in the data center space and the growth of the Embedded segment, AMD is expected to grow its revenue by far beyond just $3 billion next year. A 20% growth rate as the economy rebounds next year seems a much better base case for the company.
In such a scenario, AMD is only trading at 16x EPS targets of $6+ for 2023 with the stock at $100. The stock could easily trade at double the forward P/E multiple with this growth rate. Furthermore, even analysts have 2024 EPS targets heading towards the $6 level providing support for AMD, should our more aggressive growth targets not be met in 2023.
The main investor takeaway is that AMD is still way too cheap here at $100. The company doesn’t even need macro growth to boost revenue by 20% next year, supporting a much higher EPS target, bringing the stock back to earlier highs. AMD appears to be immune to a market downturn due to market share gains.