Description

Advanced Micro Devices (NASDAQ:AMD) is a global semiconductor company. The company is engaged in offering x86 microprocessors, as standalone devices or as incorporated into an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs) and professional graphics, and server and embedded processors and semi-custom System-on-Chip (SoC) products and technology for game consoles. The Company’s segments include the Computing and Graphics segment, and the Enterprise, Embedded and Semi-Custom segment

Source: Thomson Reuters

Investment Action

AMD closed at USD 12.75, up about 11.65%, on news that Intel Corporation (NASDAQ:INTC) has agreed to give a licensing agreement that they previously had with NVDA, that was recently expired, to AMD instead. Additionally, AMD has released more details on its upcoming GPUs which might be competitive with NVDA in the lucrative Machine Learning segment. As such, we are bullish on AMD in the short term.

Shares of AMD were previously hit hard at the start of May, after a poor earnings report and low guidance from the company. Shares fell from USD 13.50 to close to USD 10.00, almost 33%. However, it seems the stock may have been oversold, as very soon after the price climbed back to USD 11.42 before last night’s surge.

AMD climbed 11.65% last night on news of INTC making a deal with AMD to license its GPUs after its deal with NVDA expired. While the details of the agreement has yet to be formally announced, INTC’s previous agreement with NVDA was worth about USD 1.5 bn over a 6 year period, or above USD 200 mn annually. AMD had reported a loss of close to USD 500 mn in their previous FY and a similar deal with INTC would nearly half that loss.

Additionally, AMD has shared more details about their Vega GPUs, revealing that the upcoming GPUs will be competitive with NVDA’s offerings. They also have developed open-sourced ROCm Software for Machine Learning. As such, this represents AMD’s first step into the Machine Learning industry and AMD’s diversification away from its core gaming segment. This move is highly reminiscent of NVDA and how they diversified into other high growth segments, before shares of NVDA surged.

However, despite the positive news, AMD still has challenges ahead of them. NVDA has had a very large head start in the Machine Learning industry and AMD will have to fight hard to claim a significant market share. AMD has also been loss making with negative free cash flows for many years, with a lower operating margin vs NVDA. It remains to be seen if the events listed above will help AMD make the turn around to profitability.

To reiterate, we are bullish on AMD due to 1) INTC’s licensing agreement with AMD and 2) AMD’s diversification by stepping into Machine Learning. As such, we believe that in the short run, investors might be able to capture the run up on positive news, but should be cautious of AMD’s long term profitability and ability to claim market share.