Can AMD catch up to Nvidia?
AMD Investment Case!
While most people are vaguely aware of the currently ongoing AI revolution, largely due to the release of ChatGPT, many have no clue how this revolutionary technology works. Simply put, AI LLMs use sophisticated and extremely complex statistical models to analyze a large data set to calculate the most likely answer to one’s question.
This requires an ungodly amount of processing power!
It so happens that there was one company uniquely situated to provide the best computer chips for the task, and that company was Nvidia. In 2022, the year ChatGPT was released, Nvidia had sales of $27B, just 14% above AMD’s sales of $23.6B.
By 2024, Nvidia reached sales of $130.5B, completely leaving AMD in the dust!
Driven by this incredible success, Nvidia has become the world’s most valuable company with a market cap of $4.4T, whilst AMD’s stock has stagnated.
However, with the imminent release of new products and the computing demand shifting from AI training to inference, many analysts believe that AMD is poised to significantly reduce the gap with Nvidia.
In this report, I will review AMD and determine whether it is truly poised to be the next big AI chip winner.
1. Business Model
2. The AI Opportunity
3. Valuation
4. Conclusion
1. Business Model
AMD is a semiconductor design and sales technology company. Crucially, AMD doesn’t manufacture its products, it outsources that task to chip foundries such as TSMC and Global Foundries.
Their business is divided into 4 core segments:
Gaming
Embedded
Client
Data Center
Let’s expand on each of them.
Gaming
While video games have basically existed since computers first became commercially available, in the last 2 decades, the demands of these games have risen to new heights. With long storylines, detailed and smooth visuals, and sophisticated game mechanics, requiring increasingly more powerful computer chips.
AMD serves this market by specializing in making powerful gaming CPUs, GPUs, and SoCs.
GPU stands for graphics processing unit, and it does exactly what the name implies, it handles software computing to create graphical images on the screen. The company is famous for its Radeon series of GPUs.
Essentially,
AMD designs this graphics processing system, TSMC manufactures the GPU chip, while other suppliers manufacture memory chips, cooling systems, controller chips, and assemble it. AMD sets the price and markets the system to gamers and PC companies, who then incorporate it into their gaming PCs. However, sometimes AMD just sells the GPU, and other companies design the rest.
A single new system, such as the RX 6900, costed around $1,000 when released!
Another core item of AMD’s gaming segment is their Semi-Custom System-on-Chip (SoCs) offering. These are custom-designed gaming systems that incorporate existing GPUs, CPUs, and other chip technologies on a single chip. Combining all these on a single chip reduces weight, size, costs, and power requirements, making them ideal for gaming consoles.
In fact, AMD makes the chip that powers the most popular gaming consoles, such as PlayStation 5 and Xbox X/S!
This segment generated $2.8B in sales in the last 12 months, decreasing 59% from 2022, due to the slowdown of Xbox and PlayStation sales.
The sales in this segment are extremely cyclical, as not only do they depend on the console release cycle, but also on the broader gaming cycle. The gaming cycle depends on the strength of the consumer, the release of new blockbuster games, and the upgrade cycles of next-generation GPUs.