We have been fielding a fair amount of questions about AMD lately. We think it is an interesting name right now for both cyclical and secular changes in the market, and worth spending some time reviewing.
On the cyclical side, AMD is a pretty good proxy for all of semis. After two years of pandemic-induced stay-at-home buying the tide seems to be rolling out. Their last set of numbers were mixed. The PC and gaming side of their business looked weak. It turns out that a lot of consumer spending in 2020 and 2021 was just pulling future demand forward, and the bill is coming due. On the other hand, the company’s data center business remains strong. This can be summed up in four words: share gains from Intel. Intel is obviously having a lot of problems right now, driven by their missteps (to put it mildly) in manufacturing process technology. These are taking a heavy toll in Intel’s most profitable segment – selling expensive, powerful CPUs to hyperscalers like AWS and Azure. AMD’s parts are very competitive here, with a meaningful advantage in performance.
So far, this is all straightforward. Things get more interesting if we take a step back and look at what kind of company AMD is becoming. Not so long ago, they were just the alternative – the second source for CPUs and GPUs. Now, they are positioning themselves to become a broad-based semis provider for consumer and data center customers. Beyond their core products, this includes new categories acquired into the company including DPUs from Pensando and FPGAs from Xilinx, and goes further in the form of the company’s efforts to build a platform for helping customers create custom silicon.
This is important because it highlights an important trend shaking the industry. The semiconductor industry is transitioning from general purpose chips to custom and semi-custom solutions. This is driven by the slowing in Moore’s Law and a host of other factors, all of which we will revisit in another piece soon. AMD is not alone in this, we wrote recently about similar trends at Nvidia and at Qualcomm. It is hard to overstate how big this change is.
Like its peers, just having the right strategy will not guarantee success. AMD, and the others, have to contend with big, rapid changes in the composition of data center silicon requirements, which has cracked open the door to start-ups in a few key areas. And those customers bring with them the added hurdle of now designing an increasing share of their own chips. AMD also struggles in the GPU market where it is reliant on the gaming console makers, but struggles to compete with Nvidia’s sizable software moat in the form of CUDA, a crucial tool for the market for AI compute. That being said, AMD is doing a lot of thing rights, not least investing in a lot of interesting new technologies. Dylan Patel recently wrote a great piece looking at some of this, and we think the company has a lot more in the works. These challenges notwithstanding, we think AMD is in a better position than its recent stock performance would indicate.