Under the Spotlight Wall St: Advanced Micro Devices (AMD)
Despite never being the industry’s lead player, Advanced Micro Devices has thrived to become one of the biggest semiconductor manufacturers in the world. Today we put AMD Under the Spotlight.
If losing some of your brightest employees is terrible, things get even worse when those employees found a competing business. That’s just what happened to Fairchild, a now defunct semiconductor manufacturer whose marketing director, Jerry Sanders, would go on to create Advanced Micro Devices (AMD) with some other colleagues. Jerry took his marketing skills pretty seriously, focusing on sales-oriented growth targets, which wasn’t very common among other semiconductor companies.
AMD initially focused on producing logic chips. Without a known brand name, the company had to convince the market that their products were up to par. To do so, in its early days, AMD guaranteed quality control to the United States Military Standard. At the time, many competitors still struggled with unreliable microchips, so the warranted high-quality standard was a big sales driver and helped the company become a well known and established brand in the industry.
Intel is AMD’s main competitor, and their rivalry goes back to the 70s. In 1971, Intel developed the first microprocessor ever produced; by 1975, AMD would enter the microprocessor market in a not so pleasant way: reverse engineering an Intel microprocessor. The Am 9080 was nothing more than a clone of Intel’s 8080 microprocessor, arousing tensions between the two companies.
In the 80s, however, they decided to cooperate. In 1981, IBM wanted to use Intel’s processors in its computers, but required another source for their processors, should they ever fail to meet demand. Hence, AMD and Intel signed a 10-year technology exchange agreement stating that each company could acquire the right to become a second-source manufacturer of semiconductor products developed by the other, in exchange for a royalty fee. In 1986, Intel would break this agreement, giving rise to a series of lawsuits in the following decades.
This rivalry would even name one of AMD’s most iconic product ranges: the K5, K6 and K7 processors that preceded the Athlon. The K letter in their names was a reference to Kryptonite, the otherworldly crystal that weakened Superman in the comics. AMD half-jokingly hoped to weaken Intel, the market leader.
Even though AMD became a big player in the semiconductor industry, its success probably wouldn’t be as big without the gigantic acquisitions it has done in the last 20 years. The greatest cash cow is the GPU manufacturer ATI. Acquired in 2006 for US$5.4b, the company was NVIDIA’s main competitor in the graphics processing units industry. ATI’s acquisition might have come at a hefty price, but the return on the invested capital makes it undoubtedly worthy: in the second quarter of 2022 alone, AMD’s gaming revenue was US$1.7b, with GPUs making up for a huge part of it.
Another huge acquisition was the FPGA colossus Xilinx, bought in October 2020 for US$49b. FPGA stands for field-programmable gate array. Basically, they’re integrated circuits that can be configured by users after manufacturing. As they can be made to fit the customer’s needs (up to a certain extent), they’re extremely useful across different industries worldwide. Xilinx is one of the heavyweights in FPGAs: in the last quarter of 2021, the company’s net revenue was over US$1b and its net profits were over US$300m.
Considering that Intel holds 64% of the world’s CPU market share and NVIDIA has 78% of GPU’s market share, one might be tempted to see AMD as a loser, feeding off scraps left by the other giants. The reality is that in Q2 2022 alone, AMD’s revenue was US$6.4b, with over 46% of gross margin.
Not only is AMD extremely profitable, it’s also extremely diversified. As it stands today, most of its revenue comes with an almost equal weight between data centers, retail CPUs, gaming and FPGAs (boosted by the acquisition of Xilinx). Its revenue is also diversified across sectors, as AMD’s products are used in 5G communications, automotive industries, defense and aerospatial and the healthcare sectors. When it comes to gaming, AMD is actually the #1 semiconductor manufacturer, providing chips for Playstation 5, Xbox S and X series and Steam Deck.
Due to the explosion of AI and IoT, AMD forecasts a total addressable market of US$300b and aims to tackle it head first. Despite the whopping acquisition of Xilinx less than two years ago, the company is well capitalised, with more than US$5.9b in cash and short-term investments, and no scary debts. Although total debt is at an all-time high at US$3.1b, net debt is near all-time lows at negative US$2.7b, and the effective interest rate on its debt is at 3.73%, a record for the company. This should allow for bigger R&D investments that could in turn generate bigger profits.
For Q3 2022, AMD expects revenue to be approximately US$6.7b, an increase of approximately 55% year-on-year, led by growth in the Data Center and Embedded (FPGAs) segments. For the full calendar year 2022, AMD continues to expect revenue to be approximately US$26.3b – up approximately 60% from 2021.