To The Moon

Summary

• AMD will continue to benefit from the growth of gaming as a whole.
• AMD’s software will be crucial for the future trajectory of the company and should be something all investors focus on for the foreseeable future.
• The majority of AMD’s assets are non-current.

Justin Sullivan

Opportunity

AMD's opportunity was nicely outlined in the company's most recent Financial Analyst Day, a four-hour showcase that I encourage all of you to watch if you're interested in learning more about the company. Some of the biggest takeaways were contained within the early section of the presentation, particularly the outline of how much the company's opportunity has changed from 2020, the date of the last analyst day, to 2022. In 2020, AMD estimated their TAM was approximately $79B, with $35B associated with the Data Center, $32B associated with PCs, and $12B associated with Gaming. Post-acquisition of Pensando and Xilinx, AMD now estimates their current opportunity to be approximately $135B, attributable to opportunities that measure $40B for PCs, $29B for Embedded, $50B for Data Center and $16B for Gaming. Lastly, AMD also provided a slide that outlines the enormous opportunity that AMD has in front of it, of which they aim to address over the course of the next five years. The contents of these projections will be what we address briefly for the remainder of this section.

AMD's big opportunity (AMD)

Gaming and PCs

Staying surface level for a moment, AMD will continue to benefit from the growth of gaming as a whole. Readers have heard me harp on this before, however, it is worth touching upon again for a moment. Gaming as an entertainment source has grown more rapidly than any other counterpart, as outlined by the change in decades' worth of expenditures outlined below:

The growth of the video game space (MatthewBall)

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Globally, global gaming industry revenues are anticipated to surpass $320B, growing at an 8% CAGR between the 2022 and 2026 forecast period:

Total Global Video Game Revenue Projections (PWC)

In the PC gaming space (most commonly where GPUs have been seen as the most prevalent application historically) and more generally applied to the entire GPU space as a whole, AMD quite clearly plays second fiddle to Nvidia, a phenomenon that has been true from 2003 up until today:

Historical AMD vs. NVDA GPU Market Share (Punch Card Investor-Substack)

Recent AMD vs. NVDA GPU Market Share (Share Punch Card Investor-Substack)

Although the company still has a commendable market share in this space, where they truly shine is in the console gaming space. Currently, AMD powers the Playstation 5 and Xbox Series S/X consoles, and thus should be able to yield proportional benefits to the growth of associated expenditures.

On the PC side of things, AMD's CPU business stands to benefit from continual improvements in the underlying hardware, as well as a strong footing in the high-end consumer and enterprise niches of the market. Though a large opportunity, the company's projections may be ambitious, given the growth that the PC market has seen over the last decade. As an example, pandemic-induced headwinds resulted in total PC shipments for FY'21 being approximately341M units, representing a 15% and 27% YoY and Yo2Y growth rate, respectively. Market share nuances aside, a $50B TAM insinuates that shipments will continue growing rapidly, a phenomenon I don't believe holds up under a stress test, given macroeconomic factors in play at the moment, at least in the short term, especially given the pull-forward of years' worth of tech expenditures that many consumers underwent during the pandemic. Arguably in this segment, and more broadly with CPUs as a whole investors are betting that AMD's hardware tech will keep improving relative to competitors and Intel will be unable to outcompete the company as they have been able to in the past. Given Intel's horrific mismanagement seen over the last few years, I don't have a problem placing a few chips (no pun intended) on this bet.

Data Center

AMD's data center-related offerings stand to benefit from some of the largest technological trends our world has ever seen, particularly with megatrends including but not limited to Cloud, AI, HPC, Data Analytics, and Video Streaming. All of these end-markets are important, however, I will spend time in this section quantifying the first three for simplicity's sake, being I feel they are the most pertinent. Starting off with the cloud, this is arguably one the most important pieces of technology out there, with applications and use-cases touching almost every company and industry. Gartner anticipates that expenditures in this area are expected to reach nearly $600B in end-user spending by 2023, almost a 50% increase from the $411B in 2021. Using the hyperscalers as a proxy for cloud spend, i.e. AWS, Azure, and GCP, these segments bolstered phenomenal growth, increasing 33.3%, 40%, and 36%, respectively (all showing slight decelerations in YoY growth rates) within a tough macro and FX backdrop in their most recent earnings releases seen in thelast few weeks. The point I am trying to convey here is although that growth rates may decelerate in the cloud, this is still a behemoth of an industry to be involved with going forwards, and a positive for AMD overall.We saw evidence of strong previous current and forecasted demand, but I will harp on that more later.

Moving over to AI, there is no doubt that these computing developments have the ability to reshape almost every industry known to man. Fortune Business anticipates that the market value of Global AI will reach nearly $270B by 2027 and PwC Global estimates that the contribution of AI to the global economy will reach approximately $16T by 2030. Although the accuracy of these projections is up for debate, it is clear that these developments are not lacking ambition or estimated scope. AMD's technical competencies in this area are still up for debate, and I would argue largely in their infantile state. In comparison to NVDA, the company falls largely behind in its technology aimed at deploying and training AI models, the company has only recently incorporated Xilinx offerings that will likely need years of work in order to be competitive, and AMD's own software and associated SDK geared at AI, in general, is again in its early stages. We will dig into these offerings more later, however, there is still some work that needs to be done on AMD's part in order to capture this large opportunity.

Lastly, with HPC, this technology stands to empower engineers, data scientists, etc. to solve the largest and most complex problems in the shortest amount of time, all maximizing resources at a greater rate than traditional computing. As I'm sure most of you are aware, this is where AMD has some bragging rights. The company currently powers the world's most powerful supercomputers, with EPYC CPUs and AMD Instinct Accelerators currently achieving number one spots on Top400, Green500, and HPL-AI performance lists. As an example, AMD tech is used within the ORNL Frontier system, the world's fastest supercomputer, which broke the exascale barrier. Quite evidently, the company should be able to maintain a commendable presence and capture a host of value in this space going forwards. These are just three sub-niches of the data center and business segment and I think their associated descriptions sufficiently convey the magnitude of the opportunity as a whole.

Embedded, Automotive, Communications

Embedded systems play a role in almost every industry and sector today, ranging from ensuring the general functionality of home appliances to powering interactive kiosks and medical devices. With a $30B+ future opportunity, AMD Ryzen embedded processors stand to be intertwined with modern industries ranging from Aerospace to Networking. Moving along, both Automotive and Communications are evidently set to benefit from $30B+ megatrends of their own. Starting off with the latter, entertainment and connectivity are becoming important parts of in-vehicle experiences. Not only that, but hosts of engineers and some of the biggest tech companies in the world are devoting considerable efforts to semi or fully autonomous vehicles, one of the most difficult engineering problems known to man today. In short, as vehicles become more and more incorporated with high-end technological capabilities, AMD's embedded hardware is likely to come into play here, similar to how Tesla's (TSLA) Model S and Model X feature Ryzen Embedded APU and RDNA-2 GPUs, respectively. Lastly, with communications, with the advent and spread of 5G, as well as an expanding array of mobile edge computing use-cases, AMD EPYC systems are becoming increasingly pertinent in the communications sector.

I've barely scratched the surface here, but as you can see AMD stands at the forefront of some of the biggest happenings in the world. Now that we have a broad understanding of the sheer abundance of opportunities AMD has in front of it, let's take a look at the technology that makes this all possible.

Financials

Within this section, we will be delving into AMD's financials, both on an annual basis, and for the company's most recent Q2 FY'22 quarterly earnings release. All dollar values mentioned within are in millions of USD.

Income Statement

Revenue

On an annual basis, AMD's top line has grown astronomically over the course of the last few years. Coming in at approximately $16.4B for FY'21, representing a 68% increase YoY and 144% increase Yo2Y, this metric has grown at nearly a 33% CAGR from 2017 to 2021, driven by strong acceleration across all business segments, with particularly noticeable growth in data center revenue, which more than doubled YoY.

Change in Total Revenue, Annual (Author)

Delving deeper, we can take a look top-line split by segment, i.e. Computing and Graphics, and Enterprise, Embedded, and Semi-Custom, respectively. The distribution between these two revenue segments has fluctuated over the last few years, with the former representing 57% of the top-line, and the latter around 43%:

Author

In my humble opinion, these segments do not provide proper insight into all of AMD's inner workings, a phenomenon that I'm glad was addressed in the company's recent reporting shift seen in Q2'22, something I will touch upon in a second. Q2'22 revenue was a record quarter for AMD on both top-line and profitability metrics, with the former coming in at approximately $5.9B, representing a 70% increase on a YoY and Yo2Y basis, respectively.

Change in Total Revenue, Quarterly (Author)

The company also started to segment its Revenue differently, a decision that was made in order to provide more transparency on segment performance and to better align reporting with long-term strategic initiatives. As such, investors gained insight into how Data Center, Client, Gaming, Embedded, and Other business segments have been performing from Q1'21 onwards, as outlined below:

Author

Starting off with Data Center, this business segment has been growing astronomically fast, coming in at $1.486B, representing 23% of Total Revenue and an 83% YoY increase. This increase was driven by strong EPYC processor demand, with cloud and enterprise customers remaining engaged despite the macro environment. The company deployed nearly 60 new instances across the top-cloud customer environments ranging from AWS to Azure and Google. This segment is likely to continue to be the shining star heading into the future. With the company expanding its data center solutions by way of the Pensando acquisition, i.e. adding a software stack and DPUs as complimentary offerings, the launch of Genoa, the company's general-purpose server CPU, as well as the overall resiliency of the space as a whole, there is a lot to be excited about.

Client Revenue came in at $2.152B, representing 33% of Total Revenue and a 25% YoY increase respectively. This segment is the one I believe is particularly susceptible to the macro environment. Although the company's progress in this area has been commendable, a result of the Ryzen Pro Processors being well-received, as well as the fact that the 5nm Ryzen Pro desktop processors launch will likely garner some attention, weakening consumer demand amidst a recessionary environment rarely leaves any consumer-dependent business unscathed and I believe this will be no different. Looking over to Gaming, this is likely to be a similar story, we have seen the likes of Nvidia report a humongous deterioration of demand (partly due to crypto market dynamics) in this segment, and the emergence of the pandemic resulted in rampant over-earning. Regardless, Q2 saw this segment come in at $1.655B, a 32% YoY growth rate and 25% of the overall top-line. Lastly, Embedded came in at $1.26B, a large increase YoY and 19% of the overall top-line.

These numbers were primarily driven by strong demand across multiple end-markets for both FPGA and adaptive computing products, particularly in core markets such as aerospace and defense, industrial vision, strong growth in the communications segment led by increased Tier 1 system vendor demand, and an increase in ORAN deployments, as well as an increase in automotive sales on the embedded CPU side of things. Looking forwards, AMD was quite adamant in their earnings call that they intend to drive figure growth through the capitalization of what they believe to be the largest opportunity in the world right now, AI. It is still up for debate how much the company will be able to achieve in this space, particularly since Nvidia is so well positioned, but if they are able to continually improve their hardware and software offerings therein, this picture may very well change going forwards.

Conclusion

In a Nasdaq full of zombie companies, and many high-flyers wilting under the pressures of a weak macro environment, AMD presents itself as a shining light amidst the darkness. This company will be one I continue to monitor closely.

Source: Seeking Alpha

$AMD(AMD)$