- AMD hasn't been this healthy in many years.
- However, many large challenges are now emerging.
- These challenges will grow ever more intense over the next 1.5 years and beyond.
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Advanced Micro Devices (NASDAQ:AMD) hasn’t been in such a good position as today for a long time. Since 2003, with the launch of its Opteron server processors, it had mostly been downhill for AMD. Yet, today, AMD can boast a competitive CPU lineup across consumer (Ryzen) and server (EPYC) markets. At the same time, it can be said that AMD recovered some ground in the GPU business versus Nvidia (NVDA) as well.
Yet, at the same time, an incredible number of challenges have arrayed themselves against AMD, and at times also Intel (INTC) and Nvidia. This article will cover all of the different challenges coming up – most of which hit within the next 1.5 years.
Historically, Intel has been AMD’s main problem. Even when Intel dropped the ball, it didn’t take many years to catch it again and run away with it. Typically, Intel’s mistake had been at the CPU architectural level, while Intel always kept a fabrication process lead. However, recently Intel saw itself both with an architecture and process problem, though related.
Intel managed to see itself surpassed in terms of production process by Taiwan Semiconductor Manufacturing Company (TSM), to which AMD now outsources its production. This has meant that AMD now manages to ship 7nm CPUs even as Intel still struggles to make its 10nm process work. Intel went from being 1-1.5 production nodes ahead to being at least 0.5 production nodes behind. This in turn had an impact on:
- Cost. A better production process allows for a lower cost per CPU die, since for the same die design, each die takes less area on a silicon wafer.
- CPU speed. A better production process allows for higher performance for the same power consumption.
- CPU efficiency. A better production process allows for lower power consumption for the same performance.
At the same time, Intel has only taken baby steps at the architectural level for years, allowing itself to be caught by AMD’s much quicker progress with its Zen 1 and Zen 2 CPU cores. Another architectural difference, the AMD usage of chiplets versus a monolithic die, also allowed AMD to offer higher core counts. AMD thus mostly closed the single-threaded performance deficit it had to Intel, while also building a multi-threaded advantage. And it did this at a low cost to itself (due to the chiplet strategy).
However, all of this might arguably be set to change. The main reason is that Intel has started reacting on an architectural level. Although there was a level of reaction with the Sunny Cove core used in some Ice Lake products, and this is likely to continue with the Willow Cove core set to hit Intel products in 2020, the real challenge might come in 2021 (at the earliest).
That’s when the Golden Cove core will hit Intel products. Why is this so relevant? Because that might be the first core where Jim Keller’s influence should be substantial.
Jim Keller is the individual who helped put AMD back on track in 2003 and again with the Zen core. He was also at Apple (AAPL), where he is credited with leading the A4 and A5 designs, when Apple brought out its revolutionary A6 CPU. This was the first CPU that propelled Apple into the ARM performance lead since 2012 (the CPU launched in September 2012, Keller left in August 2012). It should be noticed that this is a pattern with Keller, and the same thing happened at AMD (twice), at Apple and at Tesla (TSLA). Keller left right before a significant breakthrough happened (on which he most likely was a large influence). It’s also not in dispute that Keller led chip design at PA Semi, a company Apple acquired right after it hired Keller, and whose influence on the A6 breakthrough is undisputed.
Hence, the first Intel CPU under Keller’s influence has to be respected. This CPU will likely arrive in late 2021 and likely initially use a fabrication process (Intel 10nm) near TSMC’s 7nm, which will be used to produce AMD’s next generation CPUs using Zen 3 cores. AMD’s own Zen 3 products should arrive in early 2021. Intel also expects to start using its 7nm process technology in 2021, though by then TSMC will start deploying 5nm.
A potential saving grace here. While Intel’s Golden Cove core promises to focus on single-threaded performance/IPC (Instructions Per Cycle) performance, it’s not a certainty that this will be the true new architecture already influenced by Keller. It’s possible that only the following generation bears his mark.
There are other considerations which we could make, like Intel also moving to a multi-die architecture, etc. However, those other considerations should for the moment be less relevant than Intel regaining the architectural crown.
This challenge, where Intel might again take the crown from AMD, is the biggest challenge AMD will face. Historically, it has been very punishing for AMD when it loses its (temporary) leadership to Intel.
ARM-Based Solutions Will Start Stealing Server Workloads
I have already covered this challenge in my article titled “Amazon's Graviton2 CPU: This Time, It's For Real”. The thesis is simple: ARM cores have gotten good enough to be adapted to the server room, and they’ve started being deployed as such. And ARM cores are evolving faster than x86 cores, gaining more efficiency and performance per each successive generation, so this challenge will only grow.
As the server room increasingly adopts such ARM solutions, computing workloads will shift from x86-based solutions to ARM-based solutions. This is going to at some point impact the demand for x86 server chips from Intel and AMD. From the Graviton2 CPU performance, we can expect that this point is close in time.
The Graviton2 is exclusive to Amazon.com (AMZN), but others can and will replicate its success. This is so because everyone can get equivalent IP from ARM.
Apple Will Start Leaving x86 In 2021
I’ve been talking about this for a while, and recently this has gotten a further push in media. Apple is now expected to launch the first ARM-based MacBooks in 2021.
Apple has long had enough performance in its A-Series CPUs to do this. Apple will have even more headroom in its CPUs once it targets laptops with higher power and thermal budgets. Apple will deploy CPUs targeted at higher TDPs (Thermal Design Power), and with more cores than typical for smartphone or tablet designs.
Although this challenge is expected to materialize in 2021, its announcement is likely to already take place in 2020.
This challenge will have at least 2 effects:
- It will reduce the size of the x86 market as Intel is displaced from Apple products (though not all at once). This loss will mean that Intel will have to become more aggressive in the rest of the market.
- It will lead other competitors to emulate Apple (though in this regard Microsoft has already started doing so – but with a solution inferior to Apple’s). This will further reduce the size of the x86 market for both Intel and AMD.
Apple Will Likely Also Start Using Its Own GPUs
Apple doesn’t just possess its own proprietary ARM-based CPU solution. It also has, and is using it in its A-series CPUs, its own GPU solution.
Hence, in its migration towards using its own ARM-based CPU solutions in laptops, it likely won’t limit itself to using its CPU technology. In all likelihood, it will also use some of its own GPU technology. This might displace some AMD parts.
Intel Is Entering The GPU Market
Intel is also entering the GPU market, both for consumers and for server rooms. This is set to start happening in 2020 and 2021.
This event will transform the GPU market, as it will no longer be a duopoly. At the very least, it will weaken economics for all players. At worst, it might create a credible competitor taking away visible market share from AMD and Nvidia, both in the consumer market and in the server room.
As an aside, there are rumors, but not nearly as solid as Intel entering the market (a certainty), that Huawei might also enter the server GPU market.
FPGA/ASIC Solutions Are Set To Take Away Some AI Server Workloads Away From GPUs
Many AI workloads lend themselves to fixed-function hardware (ASICs) or to more flexible hardware (FPGAs). Thus, like with bitcoin mining, it’s likely that many server-room AI workloads will migrate to such solutions and away from GPUs.
This has already started. Google (GOOG) (GOOGL) started fielding its own TPUs (Tensor Processing Units) back in 2015, and is now into its 3rd generation, while also starting to make its TPUs available for commercial workloads.
Other large cloud providers, like Amazon.com or Microsoft (MSFT) are going down the same road with their own custom hardware. And moreover, commercially available hardware is being made available from sources selling into the open market.
Obviously, Nvidia and AMD are also incorporating fixed-function AI acceleration into their own GPU chips. But this is of little comfort, as previously GPUs didn’t have to divide the available workloads with other competitors, and now they do.
In the end, the GPU server market will become smaller (or grow much slower) as a result of this trend.
We’re on the cusp of many structural changes to the x86 market which can potentially impact AMD (and Intel and Nvidia).
On top of those many changes, Intel might finally show its reaction to AMD’s improvement. Intel's efforts now have Jim Keller on their side. This is the man who gave AMD its two chances at beating Intel.
With these challenges dead ahead, AMD's stock looks particularly rich here, given its high valuation even based on the 2021 consensus (32.5x earnings).
Granted, not all is bad. Between now and 2021, AMD is still likely to expand its GPU server market share, its CPU PC/server/laptop market share, and it will also see the launch of a new console generation. But many of the changes highlighted are structural. Simply put, the markets AMD (and Intel, and Nvidia) sells into are going to turn structurally less interesting due to the incoming surge in competition.
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This article was written by
Portuguese independent trader and analyst. I have worked for both sell side (brokerage) and buy side (fund management) institutions. I've been investing professionally for around 30 years.
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