A closer look: Advanced Micro Devices
Dec 7, 2022
Holding Name: Advanced Micro Devices (NASDAQ: AMD)
Strategy: Flagship
Percent weighting of strategy: ~3.7%
"No matter who you are, no matter which business you're in, you need more compute." - Dr. Lisa Su, CEO of AMD
Titan’s Takeaway: The fanfare around new manufacturing facilities doesn’t impact AMD’s growth plans in our eyes - rather, datacenter growth is more important than ever.
Business overview: AMD is the second leading provider of fabless semiconductor solutions, well positioned to capitalize on emerging technology trends as we enter the golden age of accelerated compute. AMD is the high performance and adaptive computing leader, powering the products and services that define the future of the data center, artificial intelligence, PCs, gaming, communications, and automotive.
The company operates in four report segments:
Datacenter: Server CPU (EPYC line), Server GPU (Instinct), FPGAs (from XLNX acquisition), and adaptive SOCs (also formerly XLNX). Definition: SoC = System on Chip.
Client: Commercial and consumer desktop and notebook CPUs from its Ryzen line.
Gaming: Both discrete and system (game console SoCs) gaming GPUs from its Radeon line.
Embedded: System on Modules (SOMs), computational storage, etc. - customers include Tesla, Sony (Playstation), and Microsoft (XBox)
Why we own it: Trading near its all-time low multiple due to trough cycle dynamics and broader macroeconomic uncertainty, we believe AMD represents an attractive long-term risk-reward proposition for Flagship clients.
A fabless semiconductor provider, like AMD, is responsible for the design and sale of hardware solutions and semiconductor devices while outsourcing their fabrication to a specialized manufacturer (a “foundry” or “fab”). This allows the company to operate an asset-light business model and focus on its core competency: designing chips. As a result, AMD is less capital intensive, reinvests profits into R&D, and provides the optionality to choose different foundries based on changing needs.
We believe that AMD’s future growth is driven by two factors:
The continued ability for the company to take share gains from competitors in the datacenter space.
Total addressable market runway remains constant/grows in core verticals.
A long position in AMD represents a mid-to-high 20% IRR opportunity with a ~1.5x skew (the measure of risk) on conservative assumptions. We believe that AMD is a generational semiconductor company at the forefront of innovation in an age of exponential data growth. We expect volatility into the end of the year and initiated a small position with plans to scale this position up as our thesis continues to track.
What’s the latest: Following the passing of the CHIPS Act, onshoring manufacturing facilities has been front and center for members of Washington and investors alike. Taiwan Semiconductor Manufacturing (TSM) plans to open a new $12 billion manufacturing facility in Arizona by 2024. AMD uses TSM as a manufacturer for its chips but we don’t believe the announcements move the needle - the annual capacity from the Arizona plant increases capabilities by ~600k but is still only ~4% of total output.
The reality seems that there may need to be additional policy (CHIPS Act II?) passed to incentivize a company like AMD to buy from US based fabricators to try and offset the cost differential between buying from the U.S. versus Taiwan plants.
Sign posts moving forward: We will be monitoring datacenter outlook and look to see developing growth on the back of AMD’s 4th generation family launch. We’d like to see some sort of signal that the 4th generation improvements are meaningful enough to drive upgrades and new business especially given the high energy costs that currently eat into cloud and datacenter margins. The datacenter business is key to our differentiated perspective and 2023 growth in this business unit is important for our long-term thesis.
Assuming management executes on its guidance, Q3 2022 was the trough margin quarter. If that’s the case, 2023 should see sequential margin improvement as revenues recover which remains fundamental for our thesis moving forward.
The content contained in this material is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, solicitation of an offer, or investment advice.