AMD. The Party's Just Getting Started...
Just focus on the data center, nothing else really matters
Just over a month ago, we did a deep dive review of AMD’s recent performance and posed the question “Is The Party Over?”…
Our reason for posing this question was the strong rally the share price experienced in the last two months of 2023 while at the same time knowing that, based on the Q423 guidance, AMD’s revenue would show a YoY decline of around 4% YoY for FY23.
Our conclusion in this article was as follows:
After a disappointing year in 2023, things are starting to turn around once again for AMD. Market share growth has resumed its upward trend for both server and mobile. The company should be able to get greater access to TSMC’s 5nm in 2024 and this will help further propel their data center growth story.
AI acceleration has opened up an entirely new market for AMD. They would appear to have launched a brace of very compelling products for which there will likely be very strong demand. They’ve already announced that AI-hardware related revenues will amount to $2 billion in 2024. We think this is a conservative number. Based on their own 70% CAGR modeling, this would amount to around $10 billion annually by 2027.
We clearly remain very positive on the stock. With the recent jump in the share price, we shall take some profits off the table while continuing to maintain a core position.
We took our own advice and reduced our holding by 50% just before earnings. We bought those shares in June 2021, so we are pretty happy with our return. However, we’re not done here by a long shot. Just waiting for the right moment to get back in again.
We’ve long held the view that investors interested in AMD should focus primarily on the Data Center. This was something we wrote about in considerable detail just over year ago.
In this article, we posited that AMD may have peaked in terms of market share gain from Intel in the Notebook and Desktop segments. Indeed, we argued that AMD should and would prioritise Data Center growth over PC growth. Our conclusion was as follows:
The bottom line is that after four years of consistent progress in retaking server market share, AMD has effectively been gifted a further four years by Intel’s failure to respond to the competitive pressures which the company already recognised in the dying days of Brian Krzanich’s tenure at the head of the company. We remain long AMD and we remain unconvinced by Intel’s IDM 2.0 gambit.
In the year since we wrote this, nothing much has changed on Intel’s end and AMD still has at least another 2-3 years of “traditional” Data Center market share growth opportunity at Intel’s expense. One thing that has changed dramatically however is the AI Accelerator component of that Data Center market. That has, quite simply, exploded.
On a least two occasions now, AMD CEO Lisa Su has said that she believes the TAM for AI Acceleration hardware will reach $400 billion by 2027. She said it again on the earnings call yesterday.
In the Data Center, we see 2024 as a start of a multiyear AI adoption cycle with the market for Data Center AI accelerators growing to approximately $400 billion in 2027.
I’ve mentioned before that I was sceptical about this number. I still am, but I have to reconcile this scepticism with the fact that I know Lisa Su is not given to flights of fancy in the manner of her cousin Jensen. She’s a cautious operator, slow to make big claims and modest even when she achieves great things at AMD. She’s my #1 favourite CEO…
Regardless of what the exact number will be, its helpful to see this in some context. I really like how the guys at TheNextPlatform approach this TAM question. For starters, they help put some numbers around the current Data Center TAM:
Here is some more perspective. Gartner analysts casing the IT market reckon that in 2024 total IT spending, including hardware, software, IT services, and telecom services, will come to $5.13 trillion, up 8.8 percent calendar year on year. Of this, only $235.5 billion is expected to be for datacenter systems – meaning all servers, all storage, and all switching sold across the entire planet. That is up 8.1 percent, and we think largely thanks to the rapid adoption of AI clusters for generative AI and despite some pretty serious infrastructure spending declines in more generic serving in the datacenter.
The $235 billion existing TAM is already pretty impressive. Keep in mind that Intel and AMD’s Data Center revenues, combined, for 2023 amounted to around $22 billion, down from $25.6 billion in 2022, all of the decrease being Intel’s loss.
Against this backdrop, the idea of an additional $400 billion TAM being thrown into the mix by 2027 is just mind-boggling. Even if Lisa Su is wrong by a factor of $200 billion, it’s still mind boggling!
With these kind of numbers and growth prospects at play, everything AMD does outside of the Data Center pales into insignificance, even the PC client business. This is why I encourage investors to zoom in on Data Center and not sweat the small stuff like their console business, or even their FPGA offerings. Client, Gaming & Embedded are still fine businesses, all important, but their growth trajectories will be hugely eclipsed by what happens in Data Center.
So, with all this being said, let’s dig into the results, discuss the current quarter guidance and pick out some key highlights from the Q&A session. Thanks as always for reading!
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