For the past couple of years now, undervalued Intel Corp. (INTC, Financial) has appealed to the value investing crowd thanks to its turnaround efforts, its semiconductor fab revival, its strong dividend and hopes that it could regain the market dominance it once had.
Personally, I am not sold on Intel just yet. Not only is the company spending big bucks on building fabrication plants that will take years to contribute meaningful results, but it is also suffering from a weak PC market thanks to the deterioration of the economy and pandemic-related pull-forward. As if that was not bad enough, it is also losing processor market share left, right and center. Even its x86 market share has dropped from 98% five years ago to just 71% in the third quarter of 2022 according to Mercury Research.
Meanwhile, smaller rival Advanced Micro Devices Inc. (AMD, Financial) continues to gain market share across the board. While the semiconductor industry as a whole is almost certainly in for more near-term pain, the stock can continue to accrue value as long as its products gain market share, which will put it in an ideal position to rebound once the market recovers. Plus, even though the PC market may take longer to recover, the market for advanced chips may bounce back faster due to the resilience of big tech clients.
AMD’s market share gains remain strong
Given that AMD’s price-earnings ratio is still higher than the industry median at 45.79, the investment case for this stock remains firmly rooted in future growth and market share gains.
AMD’s x86 CPU market share has grown to 28.5% overall as of the third quarter of 2022, though its gains against Intel drop slightly when we are looking just at desktop and mobile.
On the notebook front, the Ryzen mobile offerings have gained about 4.8% year over year, and the company now controls about 20% of the notebook CPU market.
Following 10 straight quarters of record processor sales thanks to AMD’s EPYC processors, the company’s data center segment has grown head over heels, bringing server market share up 4.8% year over year and 14% since 2018.
AMD’s continued market share gains are a testament to its reliability in terms of meeting its deadlines and releasing new products on schedule that provide better value for the money.
An EPYC price-to-performance opportunity
When it comes to the data center segment, AMD appears to have a clear advantage for further growth thanks to the price-to-performance offering of its EPYC processors. In short, EPYC processors offer more cores and more threads than XEON without sacrificing computing power or performance.
In addition, EPYC seems to be the preferred option for Cloud servers, as EPYC CPUs are the most commonly used on the Amazon (AMZN, Financial) Web Service, Microsoft (MSFT, Financial) Azure and Alphabet’s (GOOG, Financial)(GOOGL, Financial) Google cloud platforms, reportedly due to higher efficiency.
The relative resilience of data center revenue as compared to PC revenue is promising for AMD in the current market environment. The company’s PC-related sales have not been immune to the PC market drawdown, but the Cloud giants are not as sensitive to a weak economy as the average consumer.
Xilinx is integrating well
One part of AMD’s business that has kind of fallen under the radar due to the semiconductor industry decline is the Xilinx acquisition, which has catapulted AMD’s embedded segment in recent quarters.
Xilinx primarily designs and develops programmable logic semiconductor devices; this is the reason why AMD was so keen to acquire the company, even though the near-term business synergies only came from some back office consolidations due to the lack of overlap between Xilinx and the rest of AMD’s businesses.
Since Xilinx was already profitable before the acquisition, it is not expected to drag down the company’s results, though it does increase research and development costs.
More importantly, the addition of Xilinx has diversified AMD’s total addressable market, range of products, intellectual property and even IP blocks, all of which should help remove roadblocks and facilitate the combined company’s growth.
“The rapid expansion of connected devices and data-intensive applications with embedded AI are driving the growing demand for highly efficient and adaptive high-performance computing solutions,” Victor Peng, the former Xilinx CEO who now serves as president of AMD’s Adaptive and Embedded Computing Group, said.
Total valuation outlook
According to Future Market Insights, the data center market is expected to expand at a compound annual growth rate of 7.5% through 2032. This will be primarily driven by Cloud data center growth, which could have a CAGR as high as 15.7% through 2030 according to estimates from Grand View Research.
The prospects for a PC market recovery are uncertain as this will be largely reliant on the overall economy, though we could see a partial recovery when the effects of stockpiling driven by the supply chain disruption begin to run out. Worldwide PC shipments were down 13.3% in 2022 according to IDC, so it seems reasonable to assume the market could rebound at least that much in the long term.
While the general programmable logic market outlook does not seem particularly high, Xilinx’s offerings in the aerospace, defense, automotive and communications industries achieved record sales in the third quarter of 2022. Xilinx’s artificial intelligence engines could help AMD capture more of the approximately $135 billion market opportunity the company sees across cloud, edge and intelligent devices.
Purely speaking in terms of growth in total addressable market, AMD’s growth outlook should come out around a range of 13% to 18% when we combine data center (especially cloud), PC and gaming recovery to historic levels, programmable logic and artificial intelligence. On top of that, AMD could continue to gain market share, let us say in a conservative range of about 2% to 3% per year. For the sake of uncertainty, I have left off potential future synergies and new developments from the Xilinx acquisition.
That leaves me with a target revenue growth rate of 15% to 21% per year. Whether or not the earnings results or the stock price will reflect that in the near term is uncertain. Any further shocks to the PC market could topple the positive effects of AMD’s data center and market share gains, even with the addition of Xilinx.