AMD: Chasing Nvidia In The AI Race (Rating Upgrade)

Sep. 20, 2023 5:44 PM ETAdvanced Micro Devices, Inc. (AMD)4 Comments

Summary

Advanced Micro Devices, Inc.'s 4th generation EPYC processors and cloud services drove a nearly doubled sequential increase in EPYC revenue.
AMD showcased new processors, including the Genoa-X and Bergamo, highlighting its leadership in high-performance computing.
AMD is investing in AI accelerators to compete with market leader Nvidia Corporation and capitalize on the growing demand for AI technologies.
We assign a BUY rating and expect AMD to partially take Nvidia's share of the datacenter AI accelerator.

Abstract connected dots and lines. Concept of AI technology, Motion of digital data flow. — your_photo

Investment thesis

Advanced Micro Devices, Inc. (NASDAQ:AMD) has delivered outstanding performance with its new Genoa-X and Bergamo processors, strengthening the company's leadership position in high performance computing. Combined with the expected strengthening of AMD's position in the data center segment, the company has the potential to develop in the rapidly evolving artificial intelligence market, steadily increasing investments in research and development.

If the AMD MI300X, which the company claims is AMD's most powerful GPU to date and is designed specifically for generative artificial intelligence, lives up to expectations, it will allow AMD to close the gap with Nvidia Corporation (NVDA) and compete in a lucrative market. In addition, AMD has a strong position in the market for processors for gaming consoles, which provides a stable revenue stream and diversifies the company's business, making it attractive to investors. Therefore, we see both short-term and long-term growth prospects for the "BUY" status.

Data Center segment

Revenue in the Data Center segment totaled $1.3 bln in 2Q 2023, down 11% y/y, but up 2% from 1Q 2023.

While market demand remains uncertain, adoption of 4th generation EPYC processors accelerated in 2Q 2023, with revenue almost doubling from the prior quarter. Cloud companies have been aggressively adopting processors to power their internal infrastructure and public offerings.

On June 14, AMD presented its latest developments - AMD EPYC 9684X Genoa-X, AMD EPYC 9754 Bergamo and AMD Instinct MI300X - as part of the event titled Data Center and AI Technology Premiere. But first things first.

AMD has dominating presence within the high performance computing market, and according to the company's president and CEO, Lisa Su, the EPYC processor is the industry standard in the realm of cloud services, which, among other things, boosts the company appeal for the long term.

More than 640 EPYC processors are operational as of this time, with another 200 to be put into service by the end of 2023. Enterprise use of EPYC continues to grow, especially for tasks requiring higher precision and specifications. Sales of EPYC processors for enterprise servers increased sequentially this past quarter, with the company signing several deals with major energy, technology, financial services and healthcare companies. For example, Banco de Brasil, BNP Paribas and Uber switched to EPYC processors in 2Q 2023.

Compared with the competition's 4th generation Intel Xeon Platinum 8490H processor, AMD's 4th generation EPYC 9654 Genoa processor delivers 1.8 times the performance per watt of the industry standard SPEC, making it not only the top performer, but also the best-in-class in terms of energy efficiency. AMD released Genoa last November, and even though other products have hit the market since then, Genoa remains the best-performing and most efficient processor in the industry to this day, while Genoa-X takes that performance to the next level for technical computing. Compared with the 4th Gen Intel Xeon Platinum 8490H 60 Core, the Genoa-X 96 Core processor delivers more than double the performance, namely from 2.2x to 2.9x depending on the type of tests.

According to Phoronix tests, both in high-performance computing and AI-related tasks, which Genoa-X (9684X) was designed for, the processor - even in standard mode - demonstrates higher performance compared with Genoa (9654) at a thermal design power, or TDP, of 400 watts, as well as Milan-X (7773X), Xeon Sapphire Rapids (8490H) and Xeon Max (9480). On top of that, of note is the Genoa-X's speed improvement over the Milan-X, as the time difference between their release is less than two years.

Let's move on to look at the AMD EPYC 9754 Bergamo. The server processor Bergamo is AMD's first processor designed specifically for cloud computing. Bergamo uses the entire platform infrastructure the company has already developed for Genoa and supports the same next-generation memory, but allows for expansion to 128 cores per socket to maximize performance and energy efficiency in the cloud.

Compared with the 4th Gen Intel Xeon Platinum 8490H, Bergamo delivers 1.6x to 2.6x performance gains across a wide range of cloud services.

In the abovementioned tests, despite atypical workloads, Bergamo (9754) demonstrated a decent result, which is attributable to 128 cores. In another Phoronix test with workloads that are well parallelized (which is what Bergamo is good at), it outperformed all competition, again proving its efficiency.

AI is the future

Although the world is still at the very start of the new AI era, it is clear that AI offers AMD significant growth opportunities in the long term. Realizing this, the company is not only focusing on the Data Center segment, but also paying attention to investments in AI.

Last November, the release of ChatGPT by OpenAI aroused interest in artificial intelligence and prompted the shares of many companies in this field to rise rapidly. Shares of Nvidia, which holds 90% of the artificial intelligence chip market, soared by 219% over the past year. AMD has been forced to shorten the gap with Nvidia in this industry to remain competitive. However, a recent study suggested that AMD may not be that far behind Nvidia. MosaicML tested and compared previous-generation GPUs (AMD MI250 and Nvidia A100) and found that AMD hardware delivers 80% of Nvidia's performance.

MosaicML also stated that future software updates would likely improve the performance of AMD chips and bring them closer to Nvidia's level. It should be noted that this study does not take into account AMD's recently introduced MI300X, which the company touts as its most powerful GPU to date, designed specifically for generative AI. If the new chip lives up to AMD's expectations, the company could shorten the gap with Nvidia and have the hardware to compete for market share in a lucrative industry.

While AMD has made headlines many times this year for its potential in artificial intelligence, the company has a proven track record of success in many other hi-tech areas. For example, AMD holds an 83% share of the market of gaming console processors, being the exclusive chip supplier for Sony's PlayStation 5 and Microsoft's Xbox Series X|S. This strong position in the gaming industry has diversified the company's business and helped its revenue growth. In 2022, when many technology companies were experiencing a steep decline in revenue due to reduced consumer spending, AMD's gaming segment generated the largest proportion of revenue, growing by 21% over that fiscal year. The growth was driven largely by the company's partnerships with Sony and Microsoft.

In 2Q 2023, revenue in the gaming segment was $1.6 bln, down 5% y/y and 10% from 1Q 2023. Going forward, the company expects a slight decline in gaming GPU sales as the volatility in the PC market is only about to end while no major video game releases are expected in the coming months.

AMD's financial results

We are lowering the forecast (compared to our previous projections) for revenue in the gaming segment from $7.8 bln (+15% y/y) to $6.2 bln (-8% y/y) for 2023 and from $10.4 bln (+33% y/y) to $7.1 bln (+14% y/y) for 2024, which has been partially offset by the increased forecasts for the Client segment and the Data Center segment. Expectations for revenue growth in the Data Center segment are largely driven by EPYC processors, particularly the progress with Genoa and Bergamo.

As a result, we are lowering the forecast for AMD's revenue from $23.5 bln (-0.4% y/y) to $22.2 bln (-6% y/y) for 2023 and from $31.6 bln (+34% y/y) to $29.8 bln (+34% y/y) for 2024.

On the back of the changes to the forecast for AMD's revenue, we are lowering the EBITDA forecast from $4346 mln (-19% y/y) to $3959 mln (-26% y/y) for 2023, and from $7538 mln (+73% y/y) to $6998 mln (+77% y/y) for 2024.

Valuation

We are raising the target price of shares from $134 to $137 due to:

a slight reduction of the EBITDA forecast;
the decrease of net debt from ($3472) mln to ($4571) mln;
The shift of the FTM valuation period, which has made future financial results closer by one quarter and reduced the discount factor. We evaluate AMD based on its estimated and discounted results for 2025.

Given the new assumptions, we are assigning a BUY rating for the stock. The upside is 35%.

The share price of $137 was achieved by computing the target price based on estimated 2025 financial results, and discounting it to the FTM price at the rate of 13% per annum.

Conclusion

Thus, the emergence of a trend to re-equip data centers with accelerators to service AI technologies improves the potential for future growth of the industry, which promises great development potential for AMD due to its active investment in R&D. At the current stage, Nvidia dominates the AI field, but this market is growing exponentially and the demand for AI accelerators will continue to increase, which Nvidia will not have time to meet, giving AMD a chance to take its market share.

This article was written by

Invest Heroes LLC is a CIS-based research firm founded in 2018. Since then, we provide equity and fixed income research services which become more and more well-known locally among both professional investors and private clients. Here’s what we do: - Cover top 120+ Russian, US and Chinese stocks - Cover 200+ Russian bonds (corporate, SOE’s) Provide our research as a paid service to several institutional clients, a couple dozen of asset managers/PM’s and about 3000 private clients Our team consists of 2 strategists as well as a team of analysts (equity market team & 1 fixed income). 9 analysts are currently working in our team, which has achieved global professional recognition. In the first year, we got into the Refinitiv and Factset, in the second year our estimates began to participate in the Refinitiv consensus, in the third year we are the best analysts in the Refinitiv rating for a number of Russian companies and we are in a process of signing with S&P Market Intelligence. Our forecasts are often ahead of the market, because of detailed business model built for each company. Contact details Sergey Pirogov CEO +7 (919) 762 76 64 s.pirogov@invest-heroes.ru Aleksandr Sayganov Head of Research +7 (708) 1238294 a.sayganov@invest-heroes.ru

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