AMD: Xilinx Acquisition Heats Up Competition With Intel

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Khaveen Investments
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Summary

  • In this analysis of AMD, we focused on the Xilinx acquisition to determine the potential synergies derived for AMD's CPU and GPU businesses.
  • Together with FPGAs, we see AMD's server CPU market positioning strengthening through product integration.
  • Moreover, we expect its GPU business to benefit from Xilinx's FPGAs, with their common data center customer base providing cross-sell opportunities.
  • Throughout this analysis, we found that the deal further intensifies the rivalry between Intel and AMD on multiple fronts.

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In our previous coverage on Advanced Micro Devices Inc. (NASDAQ:AMD), we analyzed its product portfolio and roadmap and determined it to be highly attractive to the company's growth outlook, and forecasted its market share to increase against Intel. Moreover, we analyzed its Enterprise, Embedded, and Semi-Custom segment and expected it to benefit from its customer relationships with major gaming console makers. We had also examined the planned Xilinx acquisition and identified AMD's Data Center Segment as having huge potential for synergies.

With the $35 bln Xilinx acquisition now complete, we delved deeper into the potential product integrations from the combined company and how they could increase AMD's competitive positioning. Specifically, we looked into the potential benefits of the deal for its CPU and GPU businesses. For CPUs, we examined the benefits of FPGAs with CPUs and product integration where we expect to benefit its server market positioning. Similarly, for its GPUs, we looked into the benefits of GPUs with FPGAs and the common data center customers of both companies. Lastly, we focused on Xilinx's FPGAs and its customers where we expect it to leverage AMD's data center customer base. We find AMD's server CPUs and GPUs to benefit most from product integrations, which enhances its competitiveness against Intel in these areas.

Server CPU Outlook Boosted with FPGA Integration

AMD has gained market share against Intel in x86 CPUs across total desktops, notebooks and servers, over the past 5 years but slipped in 2021. Its total market share at the end of 2021 was 37%.

x86 cpu share

PassMark

Source: PassMark

In the desktop market, AMD has strengthened its market positioning over the past 5 years significantly against Intel gaining share but slipped in 2021 to 45.7%.

x86 desktop share

PassMark

However, in the notebook market, Intel has managed to retain a solid market leadership but AMD has been catching up rapidly since 2018 with a market share of 24.3% in 2021.

x86 notebook share

PassMark

Lastly, the server market is dominated by Intel with AMD only starting to gain a stronger foothold in the market in 2021 with a market share of 5.9%.

x86 server share

PassMark

With the acquisition of Xilinx, the company guided its TAM from Data Center to increase from $35 bln to $45 bln while its PC TAM remain constant at $32bln. We believe this suggests that AMD's focus is on the data center and believe its CPUs could benefit from FPGAs.

According to Rambus's management, FPGAs when paired with CPUs could provide application specific hardware acceleration. There are several benefits to this as explained in the following quote.

Applications can also be partitioned into parts that run most efficiently on the CPU and other parts which run most efficiently on the FPGA. - Steven Woo, VP of Systems and Solutions at Rambus

FPGA technology has been incorporated by hyperscale cloud service providers including AWS (AMZN), Microsoft (MSFT) and Alibaba Cloud (BABA). According to AWS, FPGAs enable "developers to create custom processors/accelerators that provide tailored optimized calculations to accelerate a specific workload". Further, it claims that this allows significant acceleration for specific cases compared to CPUs and GPUs.

According to Dell Technologies (DELL), it claims that it benefitted from offloading certain workloads to FPGA such as a 70x speed benefit from offloading large image processing and a 20x benefit for smaller images leading to power and cost savings with increased performance. It also provided another example with edge detection where it achieved 108FPS while the CPU was only 1% loaded in the offload case allowing the CPU with compute power left.

Moreover, Intel (INTC) which acquired Altera had previously integrated its Xeon Scalable processor with an Aria 10 GX FPGA and shipped to selected customers. It also claimed the integration of its CPU with FPGA to provide an estimated 2x performance benefit. Recently, AMD has filed a patent integrating FPGAs into its CPU and we believe it could catch up with Intel's advantage.

To determine Intel's market share advantage in FPGA integrated CPUs, we estimated what percentage of Intel's server CPU generations are integrated with FPGAs. Based on data from Intel's CPU lists, we found that only 1 out of 3 generations has an FPGA integrated CPU, which is its 1st generation (Xeon Gold 6138P Processor). We then assigned a weightage based on its generations with the higher weightage for its latest generation (assuming more sales are derived from its later generations). As we found Intel only having FPGA integrated for its 1st Gen, we used the 20% weight as our market share gain factor for AMD at 1.2x.

Intel CPU Generation

Weightage

1st Gen

20%

2nd Gen

30%

3rd Gen

50%

Source: Khaveen Investments

As highlighted in our previous analysis, we expect AMD to continue gaining market share against Intel with a competitive product line up, where we forecasted its market share to increase by 0.2% per year based on its 9-year average market share change. We now further applied the 1.2x factor from FPGA integration benefit to AMD's market share gain. From this, we derived a share increase of 1.45% in 2022 which then reduced to 0.27% per year through to 2026.

AMD server x86 share forecast

Passmark, Khaveen Investments

CPU Server Market Share Forecast

2021

2022F

2023F

2024F

2025F

2026F

AMD Server Market Share (Pre-Acquisition)

5.9%

6.1%

6.4%

6.6%

6.8%

7.0%

AMD Server Market Share (Post-Acquisition)

5.9%

7.35%

7.62%

7.89%

8.16%

8.43%

Intel Server Market Share (Pre-Acquisition)

94.10%

93.88%

93.65%

93.43%

93.20%

92.98%

Intel Server Market Share (Post-Acquisition)

94.10%

92.65%

92.38%

92.11%

91.84%

91.57%

Source: Passmark, Khaveen Investments

Hence, we believe the deal with Xilinx could benefit the company's CPU business in the server segment while we expect its PC business to be unchanged. This is based on the potential of FPGA to complement its CPU business as accelerators for its data center customers for increased performance.

GPU Integration and Cross-Sell Opportunities with Data Center Customers

Based on the PC GPU market share, Intel currently leads the market but has seen its market share slip in the past few years while Nvidia (NVDA) and AMD strengthened their market position.

PC GPU share

Jon Peddie Research, Khaveen Investments

Source: Jon Peddie Research, Khaveen Investments

However, based on the company's guided TAM with Xilinx, we do not expect the deal to affect its PC GPU business but instead its data center GPUs. GPUs and FPGAs are accelerators that boost the CPU server engine according to Dell Technologies. Though, Anuj Vaishnav, a senior engineer at Xilinx, states that each product is suited for a specific workload as explained in the following quote.

Each has its own set of characteristics and set of workloads where they perform well. Take machine learning, for example, GPUs are better at training while FPGAs are better at inference. - Anuj Vaishnav, Senior Product Applications Engineer at Xilinx.

Furthermore, according to engineer Evgeni Stavinov, with decades of experience since 1998 in firms including Xilinx, SerialTek and LeCroy Corporation, FPGA is better than GPUs in ultra-low and guaranteed latency tasks while GPUs are better in terms of power, cost and throughput. He provides examples of applications for FPGA and GPU combination including "HFT (high frequency trading), database access acceleration, or search for real-time events".

Moreover, the company has several common cloud service providers as customers. Moreover, its Radeon Instinct customers include Microsoft and other server makers such as Dell, Lenovo (OTCPK:LNVGY) and HPE (HPE). We expect the company to be able to leverage its common data center customers for cross-selling opportunities.

AMD Cloud Customers

Xilinx Cloud Customers

Amazon

Amazon

Google (GOOG)

Alibaba

Tencent

Tencent (OTCPK:TCEHY)

Alibaba

IBM (IBM)

Oracle (ORCL)

Source: AMD, Xilinx

According to T4, Nvidia is the market leader of the total GPU market with a market share of 56% followed by AMD with a 26% share and Intel at 18%. With the acquisition, we expect AMD to benefit with Xilinx's FPGAs for its data center GPUs. To project its market share with Xilinx, we used an estimated 0.5% market share gain for AMD in the total GPU market against Nvidia and Intel.

All in all, while we do not expect Xilinx to benefit its PC GPU business, we see an opportunity for the company in its data center GPU business. In addition to CPUs, we believe Xilinx's FPGAs could complement its data center GPUs targeted for the acceleration of specific workloads including AI and machine learning while leveraging a common set of customers between both companies.

Stronger Competition in the FPGA Market

Xilinx is the market leader in the FPGA market and has significantly strengthened its market position similar to Intel's Altera which trails Xilinx. Xilinx's business spans across a wide range of end markets such as Data Center which accounted for 10% of total revenues in 2021 as well as Aerospace & Defense and Automotive.

From its annual report, Xilinx had highlighted its efforts to grow its data center business. In addition, its management explained in the quote below the benefits it sees from the deal with AMD for the data center.

Joining together with AMD will help accelerate growth in our data center business and enable us to pursue a broader customer base across more markets. - Victor Peng, Xilinx President and CEO

In our previous analysis on Xilinx, we analyzed its data center growth strategy targeting several major cloud service providers as well as highlighted its product development featuring its SoC FPGA called the Adaptive Compute Acceleration Platform ('ACAP'). As a highly integrated and heterogenous compute platform able to optimize architectures to adapt to data flows and patterns, we expected it to target data centers offering performance benefits in "big data and AI areas such as video transcoding, genomics, advanced search and many other leading technologies".

As highlighted in the previous point, AMD and Xilinx have several common customers in data centers. We expect Xilinx to leverage AMD's extensive customer relationships to cement its market leadership through cross-selling.

To sum up, we believe that from Xilinx's standpoint, it could also benefit by leveraging AMD's broad customer base to expand its FPGA business and solidify its market positioning. In our analysis of Lattice Semiconductor (LSCC), we had forecasted the market share of the FPGA market with Xilinx and Intel (Altera) maintaining their market share, while we expected Microchip (MCHP) and Lattice to lose share due to the expected increased competition. With this acquisition, we now expect Xilinx's market share to increase by a further 0.5% per year at Intel's expense.

FPGA market share

SourceTech, The Information Network, Company Data, Khaveen Investments

Source: SourceTech, The Information Network, Company Data, Khaveen Investments

Risks: Shareholder Dilution Due to M&A

According to AMD, Xilinx shareholders will receive 1.7234 shares of AMD common stock for each Xilinx share. Also, post-acquisition, current AMD shareholders will own around 74% of the combined company with the remainder 26% for Xilinx shareholders. We believe this indicates a shareholder dilution risk for AMD shareholders. To estimate the shares post-acquisition, we accounted for the new shares by factoring in 1.7234 AMD shares for Xilinx's current shares outstanding of 248.38 mln to obtain the shares needed for the deal. We accounted this estimate with AMD's current shares outstanding to derive the total combined company shares outstanding.

Shareholder Dilution

Shares ('mln')

Xilinx Shares Outstanding ('mln')

248.38

AMD Xilinx Ratio

1.7234

AMD Shares for Xilinx Deal

428.1

AMD Current Shares Outstanding

1,208

AMD Shares Outstanding (Post-acquisition)

1,636.1

Source: AMD, YCharts, Khaveen Investments

Furthermore, the company had a net debt of $981 mln and cash to debt ratio of 0.72x in 2021. Thus, we believe that this could limit its M&A activity to being financed with equity and pose a risk for future shareholder dilution.

Net Debt (Net Cash)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Debt

2,730

2,910

2,947

2,972

2,082

2,160

2,249

2,000

2,579

3,516

Cash & Cash Equivalents

549

869

805

785

1,264

1,185

1,078

1,466

1,595

2,535

Net Debt (Net Cash)

2,181

2,041

2,142

2,187

818

975

1,171

534

984

981

Cash to Debt Ratio

0.20

0.30

0.27

0.26

0.61

0.55

0.48

0.73

0.62

0.72

Source: AMD, Khaveen Investments

Valuation

To value the company, we used a P/S comparable valuation as we expect it to continue to have robust revenue growth with a 27.3% average revenue growth for the base case with Xilinx. We obtained the average chipmaker P/S and US-based chipmaker P/S according to 3 tiers of revenue CAGRs. We believe AMD should be valued based on the Semiconductor Industry (>20% CAGR) average P/S of 19.06x

industry average P/S

Seeking Alpha, Khaveen Investments

Base case (Unit Growth and Pricing Assumptions)

For the base case, we projected its Computing and Graphics and Enterprise, Embedded, and Semi-Custom revenue growth based on the market CAGR for PC, server and gaming consoles and price increase assumption of 15% based on the reported price hike up to 20% by DigiTimes. Additionally, for the Enterprise, Embedded, and Semi-Custom segment, we factored in our market share growth projections of 0.5% for GPU and 1.45% for CPU in 2022 and 0.27% beyond that. Lastly, we factored in Xilinx's revenue based on its 5-year average growth rate and 0.5% market share growth assumption.

Base Case Forecast ('mln')

2018

2019

2020

2021

2022F

2023F

2024F

Computing and Graphics

4,125

4,709

6,432

9,332

11,086

12,948

14,863

Growth %

38.6%

14.2%

36.6%

45.1%

18.8%

16.8%

14.8%

Enterprise, Embedded, and Semi-Custom

2,350

2,022

3,331

7,102

8,893

11,006

13,622

Growth %

3.3%

-14.0%

64.7%

113.2%

25.2%

23.8%

23.8%

Total AMD

6,475

6,731

9,763

16,434

19,979

23,954

28,485

Growth %

23.3%

4.0%

45.0%

68.3%

21.6%

19.9%

18.9%

Xilinx Revenue

3,676

4,052

4,467

4,924

Growth %

16.8%

10.2%

10.2%

10.2%

Total Company

6,475

6,731

9,763

16,434

24,031

28,421

33,409

Growth %

23.3%

4.0%

45.0%

68.3%

46.2%

18.3%

17.6%

Source: AMD, Xilinx, IDC, DigiTimes, Fortune Business Insights, Khaveen Investments

Bull case (Average Revenue Growth)

For the bull case, we applied a 6-year average growth rate for both segments but tapered down by 2% for Computing and Graphics and factored in our estimated market share gains for its server CPU and GPUs.

Bull Case Forecast ('mln')

2018

2019

2020

2021

2022F

2023F

2024F

Computing and Graphics

4,125

4,709

6,432

9,332

12,167

15,620

19,741

Growth %

38.6%

14.2%

36.6%

45.1%

30.4%

28.4%

26.4%

Enterprise, Embedded, and Semi-Custom

2,350

2,022

3,331

7,102

9,310

12,064

15,632

Growth %

3.3%

-14.0%

64.7%

113.2%

31.1%

29.6%

29.6%

Total AMD

6,475

6,731

9,763

16,434

21,477

27,684

35,373

Growth %

23.3%

4.0%

45.0%

68.3%

30.7%

28.9%

27.8%

Xilinx Revenue

3,059

3,163

3,148

3,676

4,052

4,467

4,924

Growth %

24.0%

3.4%

-0.5%

16.8%

10.2%

10.2%

10.2%

Total Company

6,475

6,731

9,763

16,434

25,530

32,151

40,296

Growth %

23.3%

4.0%

45.0%

68.3%

55.3%

25.9%

25.3%

Source: AMD, Xilinx, Khaveen Investments

Valuation

For our base case, we obtained an upside of 58.3% based on the US-based chipmaker average P/S of 9.12x with 2024 forecasted revenues. Based on our 2024 price target, we derived an upside of 16.5% in 2022 for our base case. Whereas, for our bull case, we obtained an upside of 90.9% based on the P/S of 9.12x in 2024. We obtained an upside of 24% in 2022 for our bull case based on our 2024 price target.

Valuation

Base Case

Bull Case

Revenue ($ mln) (2024F)

33,409

40,296

P/S

9.12x

9.12x

Valuation ($ mln)

304,726

367,546

Shares Outstanding ('mln')

1,636

1,636

Price Target

$186.26

$224.65

Current Price

$117.69

$117.69

Upside

58.3%

90.9%

Price Target (2022F)

$137.15

$145.99

2022 Upside

16.5%

24.0%

Price Target (2023F)

$159.83

$181.10

2023 Upside

35.8%

53.9%

Source: Khaveen Investments

Verdict

To conclude, we analyzed AMD's acquisition of Xilinx in terms of the CPU, GPU and FPGA businesses. Specifically, we believe the deal could benefit its data center businesses such as the combination of FPGA with CPUs for hardware acceleration and potential product integration similar to Intel's integrated CPUs. Moreover, we also see the deal to benefit its GPUs for data centers and leverage a common customer base in data centers for cross-selling opportunities. Lastly, we believe the deal could provide an opportunity for Xilinx to leverage AMD's robust customer base to solidify its market leadership. We see the main effect of the acquisition as intensifying the already fierce rivalry with Intel. We valued the combined company revenues based on a P/S valuation with an upside of 16.5% for the base case. Overall, we rate the company as a Buy with a target price of $137.15

This article was written by

Khaveen Investments profile picture
5.13K Followers
Khaveen Investments is a Global Macro Quantamental Hedge Fund managing a tactical asset-allocated portfolio of globally diversified investments. We have interests in 100+ investments across multiple asset classes, countries, sectors and industries. Our investment approach takes both a top-down and bottom-up approach encompassing macro-economic, fundamental, quantitative and technical analysis. We serve accredited investors throughout the globe, which include HNW individuals, SMEs, associations, and institutions. Our investment managers have decades of investment experience between them, with research expertise in emerging technologies such as Artificial Intelligence, Cloud Computing, 5G, Autonomous & ElectricVehicles, FinTech, Augmented & Virtual Reality and the Internet of Things.www.khaveen.com
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Disclosure: I/we have a beneficial long position in the shares of 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.

Additional disclosure: No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only, and was prepared from sources and data believed to be reliable, but we do not guarantee its accuracy or completeness.

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