AMD: Seizing The AI Chip Throne

Summary

Advanced Micro Devices, Inc. benefits from export restrictions on AI chips, allowing it to capture more Chinese market share and strengthen its position in the AI chip market.
AMD's processors, particularly the EPYC 8004 Series, offer superior performance and efficiency compared to competitors, making them ideal for high-performance computing and IoT applications.
AMD's acquisition of Nod.ai enhances its AI and open-source software capabilities, positioning the company as a key provider of optimized AI solutions.
AMD's publication of the source code for SEV technology benefits the company through increased transparency, open standards, and expanded partnerships with all major cloud service providers.

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Investment Thesis

Advanced Micro Devices, Inc. (NASDAQ:AMD) emerges as a compelling force ready to carve its niche in the dynamic world of artificial intelligence ("AI") and technology. With recent export restrictions on AI chips shaking up the market and AMD's groundbreaking technology releases, AMD's outlook remains positive, suggesting additional upside for the foreseeable future.

Data by YCharts

Golden Opportunity: Navigating AI Export Restrictions

AMD may benefit from a fundamental advantage emerging from recent developments in the semiconductor market, particularly the new U.S. export restrictions on AI chips to China. One of AMD's key strengths lies in its ability to compete effectively against industry giants like Intel (INTC) and Nvidia (NVDA).

AMD has been gaining market share in the CPU and GPU markets, making it an edgy competitor. The new export restrictions on AI chips are not industry-wide but primarily aimed at Nvidia. The restrictions affect Nvidia's ability to sell specific chips to China, which may allow AMD to capture more Chinese market share for AI chips on mature nodes. AMD can leverage this situation to strengthen its position in the AI chip market.

Additionally, introducing the Zen 4c architecture (EPYC 8004 Series processors) has allowed AMD to close the performance gap with Intel and Nvidia. Moreover, AMD's focus on manufacturing advancements, such as its partnership with globally expanding Taiwan Semiconductor (TSM) for advanced 7nm and 5nm processes, has given it an edge in producing cutting-edge chips.

The new restrictions on AI chip exports might impact AMD's data center solutions segment. Still, the company can mitigate these effects by focusing on other areas where it has a competitive advantage. For instance, the gaming console market has been a lucrative source of revenue, and AMD's collaboration with major console and PC manufacturers ensures a stable income stream.

Lastly, the new export restrictions may affect Nvidia's global supply chain and partnerships (as it directly hits H800 and A800), potentially creating opportunities for AMD to strengthen its existing relationships and establish new ones.

More specifically, as of June 2023, Nvidia generated $3 billion in revenue from China, which may be significantly lost due to back-to-back restrictions; this figure may be larger in the company's upcoming earnings. Lastly, the restrictions can drive global OEMs to explore alternative suppliers for AI chips (other than Nvidia), and AMD can capitalize on this shift.

10Q-Nvidia

"Zen 4c" as a Moat Against Competition

AMD's processors, particularly the EPYC 8004 Series, with their new SP6 socket coupled with the efficient "Zen 4c" core, provide up to 2x better SPECpower performance per system watt compared to competitors. In practical terms, AMD's processors consume significantly less power while still delivering top-notch performance.

In video encoding workloads, where processing power is critical, AMD's EPYC 8004 processors provide up to 2.4x the aggregate frames per hour per system watt compared to competing networking products. This illustrates AMD's advantage in applications that demand high-performance computing, such as content delivery and video streaming.

An eight-core EPYC 8004 Series processor in IoT Edge gateway workloads can provide approximately 1.8x the total throughput performance per 8kW rack compared to the competition's eight-core processor. Therefore, this highlights the efficacy of AMD's processors in IoT and edge computing, where efficiency and performance are critical to handling massive data streams generated by connected devices.

To signify its vitality, Microsoft (MSFT) Azure's endorsement of the EPYC 8004 Series processors represents the specific competitive value in the power, performance, and environmental capabilities offered by AMD's processors.

In the same context, introducing new edge platforms by Super Micro Computer (SMCI), powered by AMD's EPYC 8004 Series processors, reinforces AMD's advantage. The processors offer improved performance per core, lower TDP, and extended lifecycle support, addressing the needs of the intelligent edge and telco markets.

Finally, AMD expects YoY growth in the data center and embedded segments in H2 2023 based on expanding enterprise customer adoption and new cloud instances supported by EPYC processors.

Earnings Presentation

AMD to Acquire Open-Source AI Software Expert' Nod.ai'

The recent announcement of AMD acquiring Nod.ai presents a strategic move highlighting a fundamental advantage for AMD in the highly competitive technology industry. AMD's acquisition of Nod.ai is significant, as it positions the company further to enhance its AI and open-source software capabilities, benefiting its customers and advancing its product portfolio.

Fundamentally, the acquisition of Nod.ai brings a highly skilled team of engineers and experts in AI. Nod.ai has a strong track record in developing industry-leading software technology for optimizing AI solutions. By incorporating this expertise into AMD, the company gains a competitive advantage in AI-related markets, particularly in AI-centric hardware like AMD Instinct data center accelerators, Ryzen AI processors, EPYC processors, Versal SoCs, and Radeon GPUs.

At its core, the acquisition aligns perfectly with AMD's open AI software strategy. Notably, the AI software market is growing at a remarkable annual growth rate of 23%, to hit $1.1 trillion by 2032. AMD's strategy centers on creating an open software ecosystem to capitalize on this growth. The availability of open-source developer tools, libraries, and models is crucial to this approach. Nod.ai's contributions to open-source AI repositories, including SHARK, Torch-MLIR, and OpenXLA/IREE code generation technology, will be pivotal in capitalizing on this strategy.

Further, Nod.ai's SHARK software, known for its compiler-based automation capabilities, reduces the need for manual optimization in AI deployment. This translates to substantial time savings and highly performant AI models. With AMD's diverse portfolio of architectures, including CDNA, XDNA, RDNA, and Zen, Nod.ai's technology can be leveraged across data center, edge, and client platforms.

This streamlines AI deployment, making it faster and more efficient. Therefore, this positions AMD as a key provider of optimized AI solutions against Nvidia, especially appealing to hyperscalers, enterprises, and startups seeking top performance from their AI infrastructure.

AI Software Market Size, Report 2032

Unveiling SEV Code for the Future of Confidential Computing

AMD has recently taken a significant step in the field of confidential computing. They have published the source code for their Secure Encrypted Virtualization (SEV) technology, which serves as the foundation for AMD EPYC processor-based confidential computing virtual machines (VMs) available through major cloud service providers such as Amazon (AMZN) Web Services (AWS), Google (GOOG) Cloud, Microsoft Azure, and Oracle (ORCL) Compute Infrastructure (OCI). This strategic move by AMD offers a fundamental advantage that has far-reaching implications for the tech industry.

One of the fundamental advantages that AMD gains from publishing the source code for SEV technology is increased transparency. Transparency is a valuable asset in confidential computing, where data security is paramount. This openness allows customers, partners, and the broader tech community to thoroughly review the technology behind confidential computing VMs powered by AMD EPYC processors.

Transparency instills confidence in users and partners, as they can better understand how the technology works and how it secures their data. This transparency is a critical differentiator for AMD in a highly competitive and rapidly growing market (62% annual growth rate).

Confidential Computing Market Size, Share and Global Market Forecast to 2028

Moreover, by sharing the underpinnings of SEV technology as open source, AMD demonstrates its focus on open standards. Open-source software fosters collaboration and innovation and aligns with the ethos of community-driven development. This not only promotes cooperation within the tech industry but also enhances the security of the technology itself.

The open-source community can help identify and rectify vulnerabilities and weaknesses, making the SEV technology more robust over time. This approach builds trust among AMD's partners and customers, who expect nothing less than the utmost protection for their data.

Finally, AMD's partnerships extend beyond cloud service providers to customers like AstraZeneca (AZN) and MonetaGo. These customers are actively adopting AMD SEV technology to encrypt both full system memory and individual VM memory, expanding their offerings while ensuring data security. Thus, this customer adoption reflects the real-world effectiveness and demand for AMD's confidential computing solutions, further cementing AMD's position as a leader in this space.

Navigating AI Restrictions, SEV Risks, and Market Dynamics

Specific risks for AMD include the expansion of potential industry-wide negative impacts from export restrictions on AI chips engulfing AMD's portfolio. Also, the company may not rapidly and effectively capitalize on the limitations placed on competitors like Nvidia, as it is a short-term window of opportunity.

Additionally, while the Zen 4c architecture offers advantages, it's not immune to ongoing industry trends or adverse shifts, as observed in weak embedded and data center performance and overall profitability in Q2 2023. The acquisition of Nod.ai may not yield the expected benefits, and competition in the AI sector remains fierce.

Furthermore, open-sourcing SEV technology entails the risk of vulnerabilities being exposed and exploited. Finally, reliance on cloud service providers and customer adoption of confidential computing solutions may not be as sustainable as expected.

Earnings Presentation

Takeaway

AMD strategically positions itself as a market frontrunner by navigating the complex AI landscape. The brand exploits openings in the AI chipset market by capitalizing on export restrictions. Their "Zen 4c" emerges as a performance titan, challenging industry benchmarks.

The acquisition of Nod.ai signifies AMD's commitment to AI excellence, complementing its hardware and software expertise. The SEV source code unveils showcase AMD's dedication to transparent, secure computing. However, amidst these promising moves, challenges loom, underscoring the need for AMD to adapt and innovate continuously.

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