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Has AMD's Stock Price Gotten Ahead of Itself?

The chip designer is gaining share, but it's got deep-pocketed competition.

Bulls Say

AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products, respectively, and use TSMC’s leading-edge process technologies.

AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.

AMD has its sights set on Intel’s dominant server CPU market share. Its Epyc server chips have proved to be comparable with or even superior to certain Intel chips in many benchmark tests.

Bears Say

Intel remains the dominant player in the processor market and holds long-term advantages over AMD in aspects ranging from R&D to marketing to pricing.

Nvidia is ahead of AMD in GPU technology and has also been incredibly successful in leveraging its GPUs into adjacent end markets such as artificial intelligence.

AMD’s lack of size may make it difficult to sustain any momentum against the likes of Intel and Nvidia, which have considerably deeper pockets.

Morningstar Analyst Abhinav Davuluri Says

Advanced Micro Devices AMD designs an array of chips for various computing applications. Its products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel INTC that dominates the PC and server CPU markets. We think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise. This gives us confidence that the company will generate excess returns over the cost of capital over the next decade, thus warranting a narrow economic moat rating.

AMD outsources its chip designs to third-party foundries such as TSMC and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles, which allowed AMD’s chief foundry partner TSMC to leapfrog Intel in process technology.

We think AMD is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, we think the company will also gain share at Intel’s expense in the coming years. One potential risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though we expect x86-based chips to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semicustom processor applications, such as game consoles. Its semicustom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes with Nvidia NVDA in the discrete GPU market, though we don’t believe it is as competitive in GPUs as it is in CPUs.

In October 2020, AMD agreed to acquire Xilinx XLNX, the leading field-programmable gate array franchise, to bolster its product portfolio, drive growth, and better diversify its revenue. The acquisition is expected to close in the first quarter of 2022.

Key Proprietary Morningstar Metrics

Fair Value Estimate: $109 Star Rating: 2 Stars Economic Moat Rating: Narrow Moat Trend Rating: Stable

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