How AMD makes money? A rare case of turning defeat into victory

Table of Contents

Foreword

Introduction

I mentioned Advanced Micro Devices (ticker: AMD) in my book “The Rules of Super Growth Stocks Investing”, sections 2-3, and sections 3-7.

Why AMD can come back to life? I personally think that it is caused by multiple reasons, coupled with complex factors such as the industry trending, and this is the focus of this article.

Founding of the company

Jerry Sanders, the founder of AMD (ticker: AMD), and Gordon Moore, the founder of Intel, both came from Fairchild Semiconductor (which has been acquired by ON, ticker: ON).

But Jerry Sanders is the director of sales, and Gordon Moore is regarded as a proud student by Shockley, the founder of Fairchild Semiconductor, who has personally taught many experiences and technologies.

Note: Shockley and Fast are the top things in semiconductors, see my other article “The Power Law” for a description of this history.

Overall performance

AMD’s business performance

Here is AMD’s 2021’s business performance:

	US$ billion	Annual growth
Total revenue	16.434	+68.33%
BU1: Computing and Graphics	9.332	+45.1%
BU2: Enterprise, Embedded and Semi-Custom	7.102	+113.21%
Gross margin	48%	+300 bps

Market valuation

Such results, the stock will rise, very fair. The revenue growth performance is not far from that of Nvida (of course, it is much better than Intel, it goes without saying), but the stock price and valuation are worse than Nvidia. I leave this question to the readers.

So what is the valuation now (3/14/2022)?

	AMD	NVDA	INTC
Market capitalization (US$ billion)	166.4	533.25	180.75
Stock price	102.25	213.3	44.4
P/E	39.72	55.47	9.14
P/S	10.13	19.81	2.29
Stock performance in past 1 year	+23.94%	+61.7%	-30.4%

Stock performance

The stock price has risen from the lowest point of US$ 1.66 on September 28, 2015 (close to the threshold of delisting), and it has risen to US$ 137.5 at an alarming rate in only 6 years, which is an almost impossible task. Shares rose 148% in 2019, making it the biggest gainer for the year in the S&P 500 and Philadelphia Semiconductor Index, surging 21-fold in ten years. If counted from the bottom to the end of 2021, it will rise by as much as 82 times. This is a rare case of turning a defeat into a victory among the US stock companies that I have known for more than 40 years.

Company evolution

Lisa Su’s contribution

In 2016, Intel ended the mobile computing mobile phone and tablet division, and AMD hired Lisa Su from Freescale (acquired by NXP in 2016, ticker: NXPI) to take over as AMD CEO in 2014. As for AMD, most people so far agree that Lisa Su took office in 2014, brought AMD back to life and changed AMD’s fate, she seized the opportunity (please note, I do not use the word “luck”; Without ability, luck is useless).

Spin off chip manufacturing

AMD gave up its own production of chips, and split the production department into Globalfoundries (ticker: GFS), using TSMC (ticker: TSM) advanced process technology to produce high-end and company’s main chips, and grabbed a considerable market share of personal computer from Intel. Not only that, Lisa Su reorganized the company’s management team. Boldly open up the authorization of x86 CPU and graphics display processing unit (GPU) to the outside world in exchange for the company’s much-needed cash, and beat Nvidia to secure Apple’s graphics card, Microsoft X-Box, Sony Play Station, Valve’s important orders such as the Steam Deck console, a series of moves brought the company back to life.

Important acquisitions

Last year, the all-stock acquisition of Xilinx for US$35 billion was a very important acquisition, which allowed AMD to competw with Intel’s FPGA, as well as nVidia and Intel in data center processors and accelerated processing. It’s breaking the market duopoly.

This month, the acquisition of DPU manufacturer Pensando for US$1.9 billion completed the last piece of AMD’s cloud computing strategy; from now on, it can be on an equal footing with nVidia and Intel in data center processors and accelerated processing.

Competition landscape

Market share

According to the Q4 2021 statisticby Mercury Research:

ARM-based PC market share 9.5%, +6.1%
For x86-based PC market
- Overall Intel 74.4% +0.3%, AMD 25.6%, Via 0%
  - Notebook (exluded IoT) Intel 78.4%, AMD 21.6%, Via 0% (Best for AMD in past 15 Years)
  - Desktop (exluded IoT) Intel 83.8%, AMD 16.2%, Via 0.1%
  - Server Intel 89.3%, AMD 10.7%

Famous customers

Apple’s (ticker: AAPL) personal computers have long been dominated by AMD’s graphics chips. Samsung’s own mobile phone CPU also uses AMD’s core technology to improve display performance. Tesla’s (ticker: TSLA) in-vehicle system also uses AMD’s processors. Microsoft’s Surface laptops are mostly Intel processors, but there are also Supermicro versions, and a small number of Qualcomm (ticker: QCOM) versions of the laptops.

It is worth mentioning that in recent years, AMD has made great achievements in server processors, breaking through the almost monoply situation of Intel in the past, and won large customers such as Alphabet (tickers: GOOGL and GOOG) and the US Weather Bureau.

Romance of the Three Kingdoms is on

Investors can simplely attribute the market value growth of Nvidia and AMD in recent years to Intel’s failures. That is to say, in the best case, if Intel was still the giant in the semiconductor industry and dominated in the technology world for the past 20 years, and if neither Nvidia nor AMD took advantage of it, Intel’s market value should be the sum of the market capitalization increases of Nvidia and AMD over the years, or even higher. Of course, there is no an “if” in the real world.

Competitors

Regarding AMD’s main competitors NVIDIA and Intel, I suggest you refer to my other three blog articles “How does nVidia make money, Nvidia is changing the gaming rules“, How does Intel make money? and the benefits to invest in it“, and “Intel’s current difficult dilemma“.

credit: AMD

Closing words

However, anyone who thinks that AMD will replace or beat Intel and buy its stock as a result should disappoint you in the long run. As long as Intel returns to its glory that day, AMD’s challenge will begin. So, it’s fair to say that AMD’s future is built on whether and when Intel can return to glory.

Disclaimer

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