AMD’s Data Center Dominance Could Send the Stock Higher

FAN Editor

As expected, Advanced Micro Devices‘ (NASDAQ: AMD) fiscal first-quarter results for 2019 weren’t pretty as the fallout from the cryptocurrency bust continued.

AMD’s top and bottom lines fell steeply. Revenue was down 23% annually to $1.27 billion, while earnings were nearly halved to $0.06 per share. But the numbers were better than Wall Street’s expectations. More importantly, AMD stuck to its goal of delivering high-single-digit sales growth for the year.

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It can be said that AMD’s earnings were ho-hum at best, but here are two important takeaways from AMD’s latest results that could help the stock deliver more upside.

Intel has reason to fear

AMD’s latest results give us a clear idea that it is recording growth in markets in which rivals are falling behind.

Sales of AMD’s Ryzen CPUs (central processing units), EPYC server processors, and data center GPUs (graphics processing units) “more than doubled year over year,” CEO Lisa Su said in a conference call with analysts.

Rival Intel (NASDAQ: INTC), on the other hand, had to slash its full-year top-line expectations on account of weak demand for its data center chips. Chipzilla’s data center sales were down 6% year over year to $4.9 billion in the most recent quarter, while the market was anticipating $5.1 billion in revenue from the segment.

Intel blames the waning appetite for chips in China, where customers are working through their existing inventory of chips because they bought extra chips last year. Intel warned that it could take an extra quarter for the oversupply to end, but there are concerns that the slowdown might last until the end of the year.

The fact that AMD’s data center sales aren’t being pulled down by such headwinds indicates that it could be growing at Intel’s expense. In fact, Mercury Research estimates that AMD’s server market share increased from just 0.8% at the end of 2017 to 3.2% at the end of last year thanks to strong demand for its EPYC chips.

DIGITIMES estimates that AMD could end up cornering 10% of the server CPU market by the end of next year thanks to the launch of its 7-nanometer Rome processor that’s set to hit the market in a couple of quarters. AMD claims that Rome will deliver substantial performance improvements over EPYC, so don’t be surprised if the company manages to eat further into Intel’s server dominance.

If that happens, AMD investors can expect a nice bump in the company’s top line. Intel’s data center group delivered $4.9 billion in revenue last quarter, translating into annualized revenue of nearly $20 billion. Assuming AMD captures 10% of that market by the end of next year, server CPUs alone would supply $2 billion in revenue to the chipmaker. This would substantially move the needle for AMD, as its trailing-12-month revenue stands at $6.5 billion.

NVIDIA’s data center business is in AMD’s crosshairs

GPU titan NVIDIA (NASDAQ: NVDA) is AMD’s prime rival, and the former seems to be losing ground in the data center GPU market. AMD’s data center GPU sales increased significantly last quarter, driven by a double-digit-percentage increase in the shipment of Radeon Vega graphics cards, which were in high demand.

Google, for instance, has selected AMD’s Radeon data center GPU to enable its video game streaming platform. AMD could score more data center GPU wins thanks to products such as the MI50 and MI60 Radeon Instinct cards meant to tackle deep learning and high-performance computing workloads.

These data center accelerators are based on the 7nm manufacturing process, which NVIDIA is yet to deploy. NVIDIA’s Tesla data center GPUs are based on the 12nm process, giving AMD a technological advantage, because chips based on a smaller processing node are considered to be more efficient and powerful.

NVIDIA’s data center sales were weaker than the company’s expectations at the end of last year, when customers held back their purchases on account of economic uncertainty. But AMD is singing a different tune, which indicates that it might be gaining at its rival’s expense.

NVIDIA estimates that data center GPUs could be a $50 billion market by 2020. So AMD can mint big money if it can keep up the good work and increase its data center GPU sales.

Execution is the keyword

While AMD’s first-quarter numbers were not pretty, investors aren’t panicking; the stock is still up more than 40% in 2019. But AMD needs to deliver on its promises and achieve strong growth in the second half of the year, or it runs the risk of losing investor confidence.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.

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