AMD Q3 23’ Investment Thesis Update

Executive Summary

Thesis I: Sustained Data Center and Embedded Demand

Data Center and Embedded Segment Performance:
- Despite global economic uncertainties, AMD's Data Center segment is showing signs of recovery with a 2% sequential revenue increase and doubling revenue from the 4th Gen EPYC CPU.
- Adoption by major cloud providers and resilience in the enterprise server market indicate strong confidence in AMD's products.
- Innovations like Bergamo and Genoa-X processors, and key deployments in Meta's data centers, highlight AMD’s technological edge.
AI and Datacenter Applications:
- AMD’s focus on AI, especially in the data center with AI-powered platforms, showcases its commitment to cutting-edge solutions and real-world impact.

Thesis II: Inevitable Client and Gaming Recovery

Client Segment Resilience:
- The Client segment, despite a year-over-year decline, shows a strong sequential increase, driven by the Ryzen 7000 series and expansion into the commercial market.
- The integration of AI in Ryzen processors indicates a strategic alignment with future market demands and diversification in various sectors.
Gaming Segment Strategy:
- AMD’s response to market changes with the Radeon 7000 GPU series and a consistent presence in the semi-custom SoC sector, shows adaptability in the gaming market.

Thesis III: Massive and Expanding Semiconductor TAM

Semiconductor Industry Dynamics:
- The semiconductor industry, essential across multiple sectors, is expected to see long-term growth despite short-term normalization.
- Positive trends in PC and tablet shipments, server market growth, and data-driven demand in data centers point towards an expanding market for semiconductors.

Thesis I: Sustained Data Center and Embedded Demand

Thesis Summary

1. AMD's Data Center Financial Performance and Market Dynamics

Revenue Dynamics: AMD’s Datacenter segment experienced a year-over-year revenue reduction of 11%, settling at $1.3 billion, but showed a 2% sequential increase.
Market Shifts: This decrease is attributed to the normalization of pandemic-induced data center investments and economic uncertainties.
Emerging Confidence: Despite these challenges, AMD’s 4th Gen EPYC CPU nearly doubled its revenue, indicating a market recovery and growing confidence in AMD’s products.

2. Expansion and Resilience in Key Sectors

Cloud Provider Growth: AMD’s 4th Gen EPYC CPU has been adopted by major cloud providers like AWS, Alibaba, and Microsoft, highlighting its competitive edge.
Enterprise Server Market: AMD's EPYC processors have shown resilience and growth in the enterprise sector, being chosen by companies across various industries.

3. Strategic Market Penetration and Product Innovation

New Product Launches: AMD introduced Bergamo and Genoa-X processors, with Microsoft Azure launching the first Genoa-X High-Performance Computing instances.
Major Deployments: Meta announced the deployment of Bergamo processors across its data centers, indicating significant industry trust in AMD’s innovations.

4. Embedded Segment Performance and Prospects

Revenue Growth: AMD’s Embedded segment grew by 16% year-over-year, reaching $1.5 billion, despite a 7% sequential decline.
Diverse Sector Demand: Growth in the embedded segment is driven by demand in various sectors, including industrial, healthcare, and automotive.
Softness in Communications: The decline in demand from communication customers reflects a cautious investment approach in the tech sector.
Innovative Product Range: AMD’s launch of products like Versal Premium VP1902 and Spartan UltraScale+ FPGA family demonstrates its commitment to diverse and innovative solutions.

5. AMD's Advancements in AI and Real-World Applications

AI Strategy and Partnerships: AMD is focusing on AI hardware and software development, with partnerships like Hugging Face for AI model optimization.
Instinct MI300X GPUs Launch: AMD unveiled new GPUs optimized for generative AI, gaining interest from various sectors.
Healthcare Application: AMD's AI-powered platforms could enhance medical image analysis, demonstrating its impact in healthcare.

Overview of AMD's Data Center Financial Performance and Market Dynamics

In the second quarter of 2023, AMD's Datacenter segment demonstrated a complex financial dynamic. The segment saw a year-over-year revenue reduction of 11%, descending to $1.3 billion, alongside a modest 2% sequential increase. This revenue pullback can be primarily attributed to two factors: the base effect stemming from the earlier pandemic-induced surge in data center investments and a phase of conservatism among datacenter operators and their customers, triggered by economic uncertainties. During the pandemic, there was a remarkable spike in data center investments to meet the surging demand for online services and remote work infrastructure. However, as the pandemic waned, this elevated level of investment normalized, contributing to the observed decline in revenue.

Despite this overall reduction, the sequential growth in revenue indicates a shift. The initial conservatism, a response to the uncertain economic environment, is beginning to recede as confidence in the market increases. AMD's ability to nearly double its revenue from the 4th Gen EPYC CPU in this context is a testament to the product's strength and appeal. This growth is significant, reflecting a broader trend where businesses are regaining confidence and moving back towards standard purchasing patterns. With this return to normalcy, AMD is well-placed to leverage these changing dynamics, especially given the strong performance and rapid adoption of its EPYC CPU line.

This emerging confidence and the stabilization of spending patterns present AMD with a substantial opportunity for growth. The company's pioneering technologies, combined with strategic partnerships and a solid position in the cloud sector, underscore its potential for accelerated growth in the evolving post-pandemic market landscape.

Expansion and Resilience in Key Sectors

Moreover, AMD's expansion in the cloud provider sector, with leading companies like AWS, Alibaba, Microsoft, and Oracle adopting its 4th Gen EPYC CPU, highlights its strong market position. The introduction of 30 new AMD instances in the second quarter, including several Genoa instances, reinforces AMD's competitive edge in meeting the high-performance demands of top-tier cloud services. These developments are crucial to AMD's strategy, signaling not only a recovery in its market position but also setting a trajectory for sustained growth, particularly in the lucrative datacenter segment.

Amidst a challenging macroeconomic landscape that has generally led to weaker demand in the broader enterprise sector, AMD's EPYC processors for enterprise servers have shown remarkable resilience, exhibiting sequential growth. This growth, defying the overall market downturn, is primarily attributed to AMD's success in securing partnerships with leading companies across diverse industries such as energy, technology, financial services, and healthcare. Such milestones not only underscore AMD's expanding influence in the enterprise market but also highlight the adaptability and efficiency of its products in meeting a wide range of corporate demands.

The increasing adoption of EPYC processors is exemplified by their selection by major corporations like Banco do Brasil, BNP Paribas, Petronas, and Uber. The varied sectors these companies represent emphasize the processors' versatility and robust performance, catering to different operational needs and environments.

One illustrative example of this enterprise traction is SAP's decision to use AMD's EPYC processors to power its RISE with SAP applications on Google Cloud. SAP, a global leader in enterprise application software, requires robust, efficient, and reliable server solutions for its cloud-based services. The RISE with SAP initiative offers a comprehensive transformation-as-a-service solution, integrating capabilities like business process intelligence, technology cloud credits, and SAP Business Network starter pack.

In this context, using AMD's EPYC processors enables SAP to offer their customers enhanced performance, security, and scalability. For instance, a typical SAP customer using RISE with SAP for managing large-scale supply chain operations would benefit immensely from the high computational power of EPYC processors. These processors can efficiently handle massive datasets for real-time analytics, optimizing supply chain logistics, predicting disruptions, and facilitating quicker decision-making. The improved processing speed and data throughput also mean that SAP's clients can experience better application response times, leading to more streamlined and efficient operations.

This adoption by SAP, particularly for applications running on the Google Cloud, showcases not just the EPYC processors' technical excellence but also their cloud-optimized capabilities. It represents a significant validation of AMD's products, indicating their ability to meet the demanding performance and efficiency needs of top-tier cloud and enterprise applications. Amidst economic headwinds, AMD's continued penetration and growth in the enterprise server market affirm the compelling value proposition and strategic relevance of its offerings.

Product Innovation and Strategic Market Penetration

In Q2 23, AMD has impressively expanded its Zen 4 server product portfolio, introducing the Bergamo and Genoa-X processors. These additions signify major strides in AMD's server technology. A particularly noteworthy development is Microsoft Azure's launch of the first Genoa-X High-Performance Computing (HPC) instances. These new instances are reported to deliver over five times the performance in technical computing workloads compared to Azure's previous generation. This demonstrates the significant enhancement in computing power that Genoa-X introduces to the industry.

Bergamo, another critical new entry in AMD's lineup, is poised to set new benchmarks for cloud-native applications. Offering more than double the performance of its competitors, Bergamo not only exhibits AMD's technical ingenuity but also maintains full x86 software compatibility. This compatibility is crucial for ensuring smooth integration and a wide range of application uses.

The potential impact of Bergamo and AMD's growing influence in the industry were clearly evident at the launch event. A notable example of this was Meta's announcement to deploy Bergamo extensively across its global datacenter infrastructure. Such deployment by one of the world's leading tech giants, responsible for popular social media platforms like Facebook, Instagram, and WhatsApp, speaks volumes about the trust and reliance these major companies place in AMD's latest innovations.

Looking ahead, major server manufacturers including Dell, HPE, Lenovo, and Supermicro, are preparing to release their new server platforms based on Bergamo in the third quarter. This collaboration with top server producers not only extends the reach of AMD's advanced technologies but also reinforces its pivotal role in the server processor market. With these powerful, efficient, and compatible new products, AMD is clearly pushing the frontiers of technology, affirming its status as a trailblazer in the evolution of server technology and the broader realm of high-performance computing.

AMD's Genoa processors are redefining industry standards, establishing new benchmarks for performance in enterprise and cloud applications. These processors deliver up to 1.9 times more performance and 1.8 times better performance per watt than their competitors, positioning them as the industry’s most formidable and efficient server processors. A notable illustration of Genoa's capabilities is AWS's recent unveiling of its M7a Genoa instance. This instance is currently acknowledged as the most efficient and highest-performing general-purpose x86 instance in the market. This achievement is not just a validation of Genoa's technical excellence but also its cost-effectiveness and practical value in real-world applications.

The extent of AMD's impact in the cloud sector is further highlighted by the widespread adoption of its technology. With over 670 AMD-powered cloud instances already available and a forecasted increase of 30% by the end of the year, reaching nearly 900 instances, the growth trajectory is impressive. This surge is primarily attributed to the new Genoa deployments, signifying the industry's strong approval of AMD's latest innovation. The remarkable rise in cloud instances powered by AMD is a clear indicator of the company’s increasing influence and penetration in the cloud computing market.

Genoa's leading-edge performance and efficiency, combined with its growing presence in deployments, vividly demonstrate AMD's unwavering commitment to innovation. These factors not only enhance AMD's competitive positioning in the server processor market but also solidify its role as a key driver of technology in the sector. As Genoa continues to set new benchmarks and gain traction, AMD's role as an innovator and a leader in server processing technology becomes increasingly prominent.

The significant utility that customers derive from AMD's new processors, particularly in the case of Meta's adoption of the Bergamo processor, can be illustrated through a scenario reflecting their operations in social media and digital communication services.

Meta, encompassing platforms like Facebook, Instagram, and WhatsApp, handles an immense volume of data daily, including billions of text messages, photos, and videos uploaded and shared by users across the globe. This data not only needs to be stored but also processed for various functions like content moderation, recommendation algorithms, and personalized advertising. The processing of such large datasets requires substantial computational power and efficiency.

By deploying AMD's Bergamo processors across their global datacenter infrastructure, Meta can significantly enhance the efficiency and performance of these data-intensive tasks. For example, when a user uploads a video on Instagram, the platform not only stores the video but also processes it for different screen resolutions, checks it against policy violations, and uses machine learning algorithms to recommend it to other users. The Bergamo processor, with its capability to deliver more than double the performance of previous competitive offerings, can handle these tasks more quickly and efficiently. This improvement means that videos are processed faster, policy checks are more prompt, and the user experience is improved due to quicker and more accurate content recommendations.

Furthermore, the efficiency of Bergamo processors also aligns with Meta's sustainability goals. With more efficient processing, the energy consumption per task is reduced, contributing to lower operational costs and a smaller carbon footprint for Meta's extensive data center operations. This efficiency is particularly crucial as Meta’s platforms continue to grow in user base and feature complexity, necessitating more computing power.

By adopting AMD's Bergamo processors, companies like Meta can achieve faster data processing, improved energy efficiency, and ultimately a better user experience for their billions of users worldwide. This directly translates to operational improvements, cost savings, and enhanced service quality, illustrating the tangible benefits of AMD's innovative server technology in real-world applications.

AMD's Advancements in AI and Real-World Applications

AMD's strides in the Artificial Intelligence (AI) landscape in the second quarter reflect significant progress, underscoring key achievements in both hardware and software. These advancements cater to the surging demand for the company's datacenter AI solutions and manifest AMD's strategic and growing presence in this rapidly evolving sector.

AMD's AI strategy is built around three central pillars. Firstly, it involves the development of a comprehensive portfolio and a future-proof, multi-generational roadmap. This includes a diverse range of products like GPUs, CPUs, and adaptive computing solutions, specifically tailored for AI inferencing. This diverse approach illustrates AMD's commitment to a holistic AI technology strategy. Secondly, the company is enhancing its software platform to ensure it's open and proven, simplifying the deployment of AMD's AI hardware. This focus on an accessible software environment is crucial for user adoption and widespread application of AI technologies.

The third pillar of AMD's strategy lies in deepening and leveraging its collaborative partnerships within the tech ecosystem. These partnerships are essential for the broad-based implementation of AMD's AI solutions, ensuring their relevance and integration across various sectors.

A prime example of AMD's successful execution in these areas was the announcement by Hugging Face, a leader in the AI field, regarding the optimization of thousands of its models for a range of AMD platforms, including AMD Instinct, Ryzen, EPYC, Radeon, Versal, and Alveo. This partnership exemplifies how AMD's AI solutions are being recognized and utilized in crucial areas of AI modeling and development.

Through these focused efforts in product development, software enhancement, and ecosystem partnerships, AMD is not just meeting the complex requirements of AI computing, but also ensuring the accessibility and broad applicability of its solutions. This approach firmly positions AMD as an influential player in fostering AI innovation and widespread deployment, addressing both advanced computing needs and user-friendliness.

AMD's unveiling of the new Instinct MI300X GPUs marks a significant advancement in the realm of AI hardware, particularly in the burgeoning field of generative AI. The MI300X, engineered with the cutting-edge CDNA 3 architecture, sets a new benchmark in the industry with its unparalleled memory capacity and the fastest memory bandwidth available. These features are vital for optimizing AI inferencing performance, directly tackling some of the most pressing challenges in AI computing.

The remarkable interest from customers in both the Instinct MI300A and MI300X GPUs further highlights AMD's leading status in this domain. The company's expanding engagements with premier cloud providers, substantial enterprises, and various prominent AI organizations underscore its capabilities and reputation in the field. AMD’s strategy of providing early system access and sample units to leading players in AI, High-Performance Computing (HPC), and the cloud sector is a testament to its dedication to collaborating closely with important stakeholders. This approach ensures that AMD's products are not just technologically advanced but also finely attuned to the needs and expectations of its users.

As AMD stays on course to launch and escalate the production of these groundbreaking GPUs in the fourth quarter, it reinforces its role as a key player in the AI accelerator market. The fusion of sophisticated hardware, approachable software, and significant partnerships in the industry puts AMD in a dominant position within the AI technology sphere. The company is well-prepared to address the evolving and varied requirements of generative AI applications.

For instance, consider a leading visual effects (VFX) studio that specializes in creating high-quality computer-generated imagery (CGI) for blockbuster movies. The studio, already grappling with the increasing computational demands of rendering lifelike and detailed CGI, could leverage the AMD Instinct MI300X GPUs to significantly enhance their rendering capabilities. The GPU's large memory footprint and rapid memory bandwidth would allow the studio to process complex scenes and visual effects more efficiently, shortening rendering times and elevating the level of detail and realism in their visual outputs. This efficiency and performance boost, provided by the Instinct MI300X, can help the studio not only in meeting tight production deadlines but also in pushing the boundaries of visual storytelling, showcasing the practical impact of AMD's advancements in the high-stakes world of generative AI and content creation.

AMD's dedication to democratizing high-performance AI technology has been evident through substantial enhancements in the utility and user-friendliness of its AI hardware for developers. Central to this initiative is the major upgrade in the performance and features of AMD's ROCm (Radeon Open Compute) software, coupled with increased support for AMD silicon across prominent AI frameworks and technologies such as PyTorch, TensorFlow, Onyx, and OpenAI Triton. This broadening support not only demonstrates AMD's focus on compatibility and top-tier performance but also its responsiveness to the dynamic requirements and preferences in the AI industry.

The enhancements made to ROCm have received a positive reception from the AI community, with both customers and ecosystem partners acknowledging the improvements. An important affirmation of these efforts came from MosaicML, a leader in AI software, which emphasized the competitive training performance of AMD's Instinct MI250 accelerator. Notably, this high level of performance is often attainable without requiring significant changes to existing AI software. This feature is particularly advantageous for developers who aspire to utilize cutting-edge hardware capabilities without being burdened by the need for extensive code rewrites.

AMD's recognition of Artificial Intelligence (AI) as a multi-billion-dollar growth opportunity showcases the company’s strategic foresight in the rapidly evolving tech landscape. Understanding that AI's applications are swiftly expanding beyond traditional realms into areas like cloud, edge, and intelligent endpoints, AMD foresees the AI accelerator market in the datacenter segment alone surpassing $150 billion by 2027, demonstrating an impressive 50% compound annual growth rate (CAGR). This projection not only highlights the vast growth potential within this sector but also underscores the pivotal role AI technologies are poised to play in the coming years.

To capitalize on this opportunity, AMD is ramping up its efforts, focusing heavily on research and development (R&D), nurturing its ecosystem, and refining its go-to-market strategies. These concerted efforts are part of a calculated move to seize a substantial share of this burgeoning market. The confidence AMD exudes in its AI venture is grounded in the solid progress it has demonstrated in adhering to its AI roadmaps and the rapid growth of its hardware and software partnerships in the AI domain. This expansion speaks volumes about AMD’s current prowess and hints at its potential to lead the AI technology sector in both training and inference across a multitude of applications and industries. With its advanced technology platforms like Instinct, EPYC, Ryzen AI, Versal, and Alveo, AMD is committed to leading the pack in AI solutions.

Onto the Embedded opportunity- AMD's performance in the Embedded segment, with a 16% year-over-year increase to $1.5 billion, signifies its strong growth trajectory and innovative penetration in specialized markets. Despite this impressive growth, a 7% sequential decline suggests changing dynamics and challenges in this sector, influenced by broader economic trends and industry-specific behaviors.

Key aspects of AMD’s performance in the Embedded segment:

Diverse Demand Across Sectors: AMD has experienced growth in the Embedded segment through significant demand in industries such as industrial, vision and healthcare, automotive, and broadcast. This diversification highlights AMD's ability to expand its reach beyond its traditional markets by leveraging its technology in various applications. For instance, the use of AMD’s embedded solutions in advanced medical imaging technology underlines its expansion in the healthcare sector.

Softness in Communications: A decline in demand from communication customers, partly due to slower infrastructure upgrades, reflects a more cautious investment approach in some tech sectors. This trend might be driven by economic uncertainties or a period of adjustment following recent expansions in communication infrastructures.

Product Innovation: The launch of products like the Versal Premium VP1902 adaptive SoC and the Spartan UltraScale+ FPGA family demonstrates AMD’s commitment to innovative and diverse solutions. These products address a range of needs from high-performance tasks such as ASIC and SoC emulation and verification to more cost-sensitive applications in industrial automation and robotics.

Software Enhancements: AMD has complemented its hardware offerings with improved software platforms like Vivado and Vitis. This integration of advanced software with hardware is crucial for AMD to facilitate customer usability and enhance the performance of its embedded solutions.

Growth in Embedded CPU Sales: Notable growth in embedded CPU sales, propelled by new offerings from companies like HPE and Fortinet, indicates AMD's strengthening position in markets focused on security, storage, and networking solutions. These deployments suggest a robust acceptance and implementation of AMD’s technologies in these critical sectors.

Future Revenue Projections: Despite the segment's current growth, AMD forecasts a revenue dip in the second half of the year in the Embedded segment. This is primarily due to the normalization of lead times and inventory adjustments by some clients, hinting at a market realignment following an intense growth period.

Design Win Momentum and Revenue Synergies: AMD remains optimistic about the potential for growth and revenue synergies, especially considering its comprehensive product portfolio in adaptive and embedded processing. This outlook reinforces AMD’s confidence in its strategic direction and product lineup, in spite of short-term market volatilities.

Overall, AMD’s Embedded segment paints a picture of a dynamic market landscape. Significant year-over-year growth driven by product innovation and market diversification is contrasted with short-term declines and a cautious future outlook, indicating a complex interplay of market forces. Despite these challenges, AMD’s continued focus on innovation, strategic partnerships, and diversification across industries suggests its strong positioning for future growth and adaptability in the evolving market environment.

Thesis II: Inevitable Client and Gaming Recovery

Thesis Summary

1. Current Performance and Market Adaptation in Client Segment

Revenue Dynamics: AMD's Client segment faced a 54% year-over-year decline but showed a significant 35% sequential increase in revenue.
Market Adaptation: Growth is driven by the successful launch of Ryzen 7000 series CPUs and expansion into the commercial PC market, signifying resilience and adaptability to market changes.

2. Innovative Product Developments and Market Outlook

Ryzen 7000 Series: The Ryzen 7040 series, with its industry-first dedicated AI engine, positions AMD to meet future market demands, especially in sectors requiring high processing power and AI capabilities.
AI Integration Impact: The integration of AI into Ryzen processors opens new opportunities for AMD in various sectors, enhancing processing capabilities and efficiency.

3. Strategic Positioning with AI Integration and Ecosystem Partnerships

Focus on AI: AMD is strategically incorporating AI into its Ryzen processors, aligning with trends of generative AI in software applications.
Ecosystem Collaborations: Partnerships with ecosystem players ensure compatibility and adoption of AMD's AI-integrated processors in diverse applications.

4. Gaming Segment Performance and Market Adjustment

Market Trends: The Gaming segment witnessed a 4% year-over-year decline and a 10% sequential decrease, reflecting a market correction post-pandemic surge in gaming activities.
Product Strategy: AMD is responding with new Radeon 7000 GPU series and planned releases for the enthusiast segment, aiming to cater to a broad spectrum of gamers.

5. Resilience in Semi-Custom SoC Sector

Consistent Console Demand: The semi-custom SoC sector, driven by gaming console sales, showcases AMD’s steady presence in this market despite overall fluctuations.

6. Comprehensive Strategy and Future Outlook

Strategic Approach: AMD is navigating the dynamic gaming industry with a varied product range, positioning itself to leverage future growth opportunities across the gaming landscape.

Current Performance and Market Adaptation

AMD's Client segment, despite facing a 54% year-over-year decline in revenue due to the broader PC industry's contraction post-pandemic, shows resilience and adaptability, especially highlighted by a significant sequential increase of 35% in revenue. This growth is largely attributed to the successful launch and robust sales of the Ryzen 7000 series CPUs, particularly driven by new notebooks released by leading Original Equipment Manufacturers (OEMs).

AMD's strategic pivot to expand into the commercial PC market, marked by the introduction of its first Ryzen Pro notebook and desktop processors based on the Zen 4 architecture, indicates a keen understanding of the need to diversify and adapt to shifting market dynamics. The anticipation of over 100 AMD-powered commercial PC platforms from major OEMs like HP and Lenovo reveals AMD’s enhanced footprint in this sector. Diversifying into the commercial PC domain helps AMD mitigate risks tied to the volatility in the consumer PC market.

Innovative Product Developments and Market Outlook

Looking to the future, AMD projects growth in its Client segment in the latter half of the year, leveraging the strength of its product lineup and the growing popularity of its Ryzen 7000 CPUs. A key highlight is the Ryzen 7040 series, poised to redefine the CPU market with its industry-first integration of a dedicated AI engine in an x86 processor. This groundbreaking feature not only promises top-tier performance and energy efficiency but also opens up new vistas for CPU functionality by integrating AI processing capabilities directly within the chip.

The potential impact of the Ryzen 7040 series with an integrated AI engine is immense, particularly in sectors where enhanced processing power and AI capabilities are increasingly critical. For instance, in creative industries like graphic design, video editing, and 3D rendering, where both CPU performance and AI-driven tasks such as image processing and automated editing are crucial, the Ryzen 7040 series could offer significant improvements. These processors could enable faster rendering times, enhanced image recognition features, and more efficient workflow automation, significantly boosting productivity and creative possibilities.

This focus on incorporating AI directly into processors could not only attract new customer bases, such as creative professionals and businesses requiring advanced computing capabilities, but also position AMD to capitalize on the growing trend of AI in everyday computing. By continuing to innovate and diversify, especially in the face of an overall shrinking PC market, AMD demonstrates its commitment to staying ahead in the technology sector and responding proactively to evolving market needs and trends.

Strategic Positioning with AI Integration and Ecosystem Partnerships

As the integration of Artificial Intelligence (AI) becomes increasingly crucial in the PC industry, driven by major software providers like Microsoft embedding generative AI into their offerings, AMD is strategically positioning its Ryzen AI processors to meet and shape this future demand. Generative AI's ability to create content and provide solutions based on user inputs is revolutionizing software applications, making them more interactive and enhancing their capabilities. AMD, recognizing this transformative potential, is focusing on a multi-generational roadmap for its Ryzen AI processors, ensuring long-term relevance and competitiveness as AI applications in PCs continue to expand.

For instance, consider the field of professional content creation – such as video editing, 3D animation, or graphic design – where software increasingly utilizes AI for tasks like automated editing, scene rendering, or image upscaling. Here, AMD’s Ryzen AI processors, designed to seamlessly integrate and harness these AI functionalities, can significantly accelerate workflows, enhance creative possibilities, and enable more complex projects to be handled with greater efficiency.

Furthermore, AMD's collaboration with various ecosystem partners aims to ensure that its AI processors are comprehensively integrated into diverse software and hardware ecosystems. This strategy is vital for ensuring compatibility, fostering innovation, and promoting the widespread adoption of AI capabilities in everyday computing.

By incorporating AI directly into their Ryzen processors, AMD is set to redefine the PC user experience. For everyday users, this could translate into more intuitive interfaces, enhanced personalization, and smarter productivity tools. For example, future versions of word processors or spreadsheet applications enhanced with AI could offer more advanced data analysis, predictive text, and creative design suggestions, all accelerated by AMD's Ryzen AI processors.

Future Directions and Market Leadership in AI-Enhanced Computing

AMD’s dedication to embedding AI into its processors isn't just about keeping up with current trends; it's about leading a technological shift in what users expect from their PCs. In a market increasingly seeking smarter, more capable computing solutions, AMD's Ryzen AI processors are positioned to meet these demands, setting a new standard in consumer and professional computing. This approach showcases AMD's insight into the evolving landscape of technology and its commitment to not just responding to but also anticipating and shaping future user needs and industry directions.

Market Adjustment and Current Performance

Onto the Gaming segment- amidst a post-pandemic rebalancing in the gaming industry, AMD's Gaming segment has experienced a mixed performance, highlighted by a 4% year-over-year revenue decrease to $1.6 billion and a 10% sequential decline. This trend reflects the sector's natural adjustment following a period of elevated demand driven by pandemic-related factors, including increased leisure time and a turn towards home entertainment, which temporarily boosted the market for gaming consoles and GPUs.

Pandemic Impact and Market Correction

The pandemic saw an unprecedented spike in gaming activities, leading to heightened demand for gaming hardware. As the global situation evolves towards pre-pandemic lifestyles, a correction in the gaming market is apparent, particularly in the area of AMD’s gaming graphics sales. This segment has witnessed a decline, contrasting with the sustained, albeit slower, growth in semi-custom revenue primarily driven by robust console sales.

Strategic Product Developments

In response to these changes, AMD's product strategy within the gaming sphere remains agile and forward-looking. The introduction of the Radeon 7000 GPU series, including the RX 7600 targeted at 1080p gaming, indicates AMD’s commitment to addressing the needs of a broad spectrum of gamers. The anticipated release of higher-end Radeon cards aimed at the enthusiast segment is a strategic move to expand and diversify AMD’s portfolio in the gaming market.

Resilience in the Semi-Custom SoC Sector

AMD's success in the semi-custom SoC (System on Chip) sector, underpinned by enduring demand for gaming consoles from major players like Microsoft and Sony, also illustrates the company's resilience in this shifting landscape. This area benefits from a consistent release of new AAA gaming titles and better retail availability, sustaining the momentum in the console gaming sector.

Comprehensive Strategy and Future Outlook

Overall, AMD’s Gaming segment, although contending with the market's recalibration post-pandemic, exhibits a strategic and comprehensive approach. With its varied product offerings ranging from console SoCs to GPUs for both mainstream and high-end gaming markets, AMD is adeptly positioning itself to navigate and leverage the dynamic nature of the gaming industry. This broad-based strategy not only helps AMD ride out current market fluctuations but also places it well to capitalize on future growth opportunities across the diverse gaming landscape.

Thesis III- Massive and Expanding Semiconductor TAM

Thesis Summary

1. Semiconductor Ecosystem and Its Influence

Pervasive Role: Semiconductors are essential components in various devices and systems, driving applications across multiple industries.
Industry Integration: They are integral to consumer electronics, automotive, data centers, industrial automation, healthcare, telecommunications, energy, retail, government, and research sectors.

2. Semiconductor Industry Dynamics

Pandemic-Driven Growth: The industry saw a surge during the pandemic due to increased demand for digital services.
Post-Pandemic Adjustment: There's a normalization in demand for certain semiconductor types as remote work stabilizes and a cautious enterprise spending approach in 2023.

3. Semiconductor Industry Outlook

Long-Term Growth: Despite short-term market headwinds, the industry is expected to see significant growth, driven by continuous innovation and broader application integration.
Forecasts and Analyses: Various industry forecasts project robust growth for the semiconductor industry, fueled by demand across a range of applications.

4. Gaming Hardware Industry Dynamics and Semiconductor Impact

Market Flux in Gaming Hardware: The gaming hardware sector, including PCs and consoles, is in a contraction phase but expected to recover in the coming years.
Impact on Semiconductor Demand: This recovery will likely increase demand for high-performance semiconductors used in gaming devices.

5. Positive Trends in PC and Tablet Shipments

Growth Projections: Forecasts indicate an increase in PC and tablet shipments, which will boost semiconductor demand.
Implications for Chip Makers: The rise in shipments will lead to higher chip orders and demand for advanced semiconductor technologies.

6. Server Spending and Data Center Investments

Server Market Growth: The server market, particularly GPU servers, is witnessing growth, enhancing semiconductor demand.
IT Spending Projections: Global IT spending forecasts suggest a resilient demand for technology, benefiting semiconductor manufacturers.

7. Data Growth and Demand in Semiconductor-Dependent Data Centers

Data Explosion: The significant increase in data creation and replication boosts the need for data processing power in data centers.
Market Opportunities: This data growth presents substantial opportunities for semiconductor companies, particularly in processor and memory chip manufacturing.

Semiconductor Ecosystem

The semiconductor industry is a linchpin of modern technology, its influence permeating every aspect of our digital lives. Semiconductors themselves are vital components embedded within countless devices and systems, powering a myriad of applications across various industries. Their importance cannot be overstated, as they are integral to the functioning of contemporary society.

In consumer electronics, semiconductors are the driving force behind devices such as smartphones and laptops, facilitating the computational capabilities and connectivity that have become second nature in our daily routines. These tiny yet powerful chips allow for the sleek, fast, and smart devices that keep us connected to the world and each other.

Turning to the automotive sector, semiconductor technology has transcended its role from mere component to central feature, especially in the burgeoning arenas of electric and autonomous vehicles. These advanced chipsets manage a spectrum of functions, from controlling electric motors to processing data from an array of sensors for navigation and safety systems. The result is not just smarter vehicles but a transformation in how we view transportation.

Data centers around the globe depend on semiconductors for their very pulse. These chips form the processing core that handles vast volumes of data—facilitating everything from cloud services to enterprise operations. In these hidden behemoths of the digital age, semiconductors ensure that our insatiable demand for data and speed is met with unerring reliability and efficiency.

The industrial sector also harnesses semiconductor technology for more than just basic functions. Here, semiconductors are the brains within sophisticated automation systems and robotics, driving forward leaps in productivity and precision manufacturing. Whether it's producing consumer goods or developing new materials, semiconductors play a critical role in modern manufacturing processes.

In healthcare, the impact of semiconductors is profoundly felt. Advanced diagnostic imaging, patient monitoring systems, and a host of medical devices rely on semiconductor components. These applications not only enhance the capabilities of medical practitioners but also improve patient outcomes through more accurate diagnostics and monitoring.

The telecommunications industry, a cornerstone of global connectivity, operates on the back of semiconductor technology. The chips facilitate high-speed data transfer and reliable communications, without which our networked world would grind to a halt. Meanwhile, aerospace and defense sectors incorporate these critical components into complex systems, ensuring safety and functionality in environments where failure is not an option.

Furthermore, the energy sector uses semiconductors to enhance the efficiency and reliability of power generation and distribution systems, including renewable energy technologies. The rise of smart grids and sustainable energy solutions is largely dependent on the continued innovation within the semiconductor industry.

Retail, commercial, and government sectors similarly benefit from semiconductors, which are foundational to the systems handling transactions, inventory, logistics, and essential public services. The ubiquitous point-of-sale systems, for instance, are underpinned by semiconductor-based devices that process millions of transactions daily.

Finally, in research and development, semiconductors are indispensable in powering high-performance computing systems that enable sophisticated simulations, analyses, and the processing of complex data sets. These capabilities are essential for driving forward scientific discovery and technological innovation, cementing the role of semiconductors as the bedrock of future advancements.

Semiconductor Industry Dynamics

In the wake of the pandemic, the semiconductor industry witnessed unprecedented growth, propelled by the accelerated digitization of workplaces, education, and commerce. This digitization surge necessitated advancements in PC capabilities to support work-from-home (WFH) arrangements, leading to a significant uptick in demand for high-performance computing and cloud services. The resulting boom in semiconductor usage underscored the industry's critical role in enabling the digital economy, reinforcing its status as a foundational pillar of modern infrastructure.

As the acute phase of the pandemic transitioned into a new normal, the incremental year-over-year demand for certain types of semiconductors, such as those in PCs, naturally tapered as the initial rush to equip remote workforces stabilized. Concurrently, a cautious approach by enterprises towards capital expenditure emerged in 2023, reflective of a broader sentiment influenced by recessionary narratives. This conservatism, however, is indicative of a strategic recalibration rather than a long-term decline in semiconductor requisites.

While there have been cross currents affecting the industry this year, these are largely attributable to the realignment of supply and demand dynamics, not a downturn in the semiconductor trajectory. Even amidst these fluctuations, the aggregate demand for semiconductors remains robust, outstripping pre-pandemic levels. Looking ahead, the underlying demand trajectory for semiconductors is poised to maintain its strength, driven by continuous innovation and the integration of semiconductor technology into an ever-widening array of applications and sectors.

Semiconductor Industry Outlook

The semiconductor industry, a critical driver of technological progress, is navigating a complex landscape marked by both challenges and opportunities as it moves toward the next decade. As per ASML, a bellwether for the industry, there's an expectation of substantial growth for 2023, estimated at around 30%, despite current market headwinds. This optimism is rooted in a formidable backlog worth €38 billion, which cushions the impact of macroeconomic uncertainties and customer cautiousness. ASML's confidence is bolstered by "global megatrends in the electronics industry," projecting a steady 7.4 percent annual growth for chipmakers, with ASML positioned to capture a significant share of this expansion. Looking ahead, ASML's revised forecasts promise an 11% annual revenue growth through 2030, underpinned by soaring demand for its cutting-edge chipmaking equipment.

Fitch's broader industry analysis aligns with this optimistic long-term view, predicting that semiconductor revenues will double to reach USD 1 trillion by 2030, translating to a robust CAGR of over 9%. This growth trajectory is anticipated to be fueled by the persistent demand for semiconductors across an array of applications, from consumer electronics to industrial automation.

Contrastingly, Gartner presents a more conservative outlook for the immediate future, anticipating an 11.2% contraction in global semiconductor revenue for 2023. This projection, reflecting a downturn to $562.7 billion from 2022's $599.6 billion, is attributed to a cooling market and pervasive economic headwinds.

Industry body SEMI provides a silver lining, suggesting that the sector's slump is temporal, with recovery expected to gain traction in the latter half of 2023 and gathering momentum into 2024. All market segments are projected to bounce back, with electronics sales potentially surpassing their 2022 peak. SEMI also underscores the record $73 billion revenue hit by the semiconductor materials market in 2022, and forecasts global semiconductor equipment sales to reach $87 billion in 2023, with a rebound anticipated in 2024.

Semiconductor Trade Statistics forecasts a significant rebound for the global semiconductor industry in 2024, estimating growth of 11.8% to $576 billion, with the memory segment potentially witnessing a surge of up to 40% from the previous year.

In the United States, Statista expects semiconductor spending to dip by 13% in 2023, following robust growth in the preceding years. Yet, the sector is predicted to recapture momentum in 2024 with an anticipated rebound of 10%.

Looking at the broader horizon, the industry is projected to grow at a CAGR of 10.86% from 2023 to 2028, according to insights from Mordor Intelligence. This expansion, expected to surge the market size from an estimated $0.65 trillion in 2023 to $1.09 trillion by 2028, is propelled by the proliferation of consumer electronics, AI, IoT, and machine learning technologies. The evolution of multi-chip packages, high-capacity memory solutions, and system on a chip (SoC) technologies, famed for their high integration levels and efficiency, are key contributors to this growth.

This patchwork of forecasts paints a picture of an industry at the inflection point of its growth cycle. While short-term headwinds have led to conservative spending and a cautious approach from enterprises, the long-term prospects remain vibrant. Driven by relentless innovation and an expanding repertoire of semiconductor applications, the industry's future is one of robust growth, with temporary fluctuations viewed as recalibration rather than regression.

Gaming Hardware Industry Dynamics and Semiconductor Impact

The gaming hardware industry, encompassing PC gaming rigs and consoles, is experiencing a cyclical flux that presents both challenges and opportunities for the semiconductor ecosystem. After a period of explosive growth, the market is currently in a contraction phase, with the PC gaming hardware market having receded from $68.5 billion in 2021 to an expected $37 billion in 2023. However, projections indicate a recovery on the horizon, with forecasts suggesting a rebound to $41 billion in 2024 and further growth to $47 billion by 2025.

TechSpot's analysis concurs with this outlook, predicting the PC gaming hardware industry will regain its footing to hit revenues of $47.1 billion by 2025, marking a notable resurgence from the $42 billion recorded in 2022. This anticipated recovery is reflective of a broader trend within the gaming sector, suggesting a transient downturn rather than a prolonged slump.

Looking at the global gaming hardware market, which includes peripherals like controllers, headsets, and gaming-specific cameras, a steady CAGR of 5.5% from 2022 to 2030 is expected. This growth trajectory is propelled by a robust appetite for gaming content, the escalating popularity of eSports, and technological advancements in gaming devices.

The sustained interest in eSports, coupled with the cultural entrenchment of gaming as a mainstream form of entertainment, ensures that the underlying demand for advanced semiconductor technology remains robust. As the market recovers and expands, semiconductor companies with a stake in gaming hardware can expect renewed opportunities for growth, innovation, and revenue generation. This positions the gaming sector as a significant contributor to the semiconductor industry's long-term growth narrative.

For semiconductor manufacturers, particularly those producing high-performance chips for gaming PCs and consoles, these projections signify a potential tailwind. While the short-term contraction may lead to cautious inventory management and a temporary dip in demand for gaming-specific semiconductors, the anticipated rebound in gaming hardware spending bodes well for the industry. This expected increase in demand will likely be driven by the next generation of gaming consoles and the continuous need for powerful GPUs and CPUs in PC gaming.

Positive Trends in PC and Tablet Shipments Boost Semiconductor Demand

The forecasts from IDC and Gartner for PC and tablet shipment growth in 2024 signal a positive trend for high-performance semiconductor demand. IDC's projection of a 3.7% rise in PC shipments to 261.4 million units and tablet growth of 4.4% to 135 million units, coupled with Gartner's estimate of a 4.9% increase in the PC market, points to a substantial rebound for chip manufacturers.

The key implications for semiconductor demand include:

Higher Chip Orders: More PC and tablet shipments will lead to a greater volume of semiconductor components being ordered, particularly CPUs and GPUs.

Demand for Advanced Chips: Newer, feature-rich PC and tablet models will drive demand for high-performance chips.

Diverse Market Demand: Growth across consumer and business segments suggests increased spending on both standard and premium devices.

Supply Chain Adjustments: Semiconductor suppliers will need to optimize production to meet demand without risking excess inventory.

R&D and Innovation Focus: Chip makers may accelerate R&D in advanced semiconductor technologies to stay competitive.

Overall, these projections indicate a robust recovery for the semiconductor industry, especially for high-performance chip makers, as they prepare to meet the rising demands of 2024's PC and tablet markets.

Server Spending and Data Center Investments Propel Semiconductor Growth

The latest forecasts for server spending and data center investments indicate a significant tailwind for the semiconductor ecosystem, suggesting resilience and growth potential despite broader economic uncertainties.

According to IDC, the server market saw a 3.4% year-over-year increase in the second quarter of 2023, mainly attributed to higher average selling prices (ASPs). This increase has been significantly propelled by the demand for GPU servers from hyperscale operators, who continue to invest in data center capabilities to support intensive workloads like AI and machine learning.

The 5.5% rise in global IT spending for 2023, as predicted by Gartner, despite the looming recession concerns, further solidifies the narrative of a tailwind for the semiconductor sector. The consistent growth across all regions not only points to a sustained investment in IT infrastructure but also to a long-term strategic commitment to digital transformation, which is intrinsically linked to semiconductor usage.

Gartner's projection of an 8% expansion in worldwide IT spending in 2024, with the market reaching $5.1 trillion, underscores the robust momentum in technology investments. This broad IT market growth, inclusive of data center systems, software, devices, IT services, and telecom services, with AI investments playing a substantial role, reflects a healthy demand environment for semiconductors, particularly those that enable advanced computing and data processing.

Focusing on server sales, IDC forecasts a remarkable 18.2% growth for non-X86 servers and a 4.9% increase for X86 server spending in 2023. The robust growth in non-X86 server spending, although starting from a smaller base, indicates a diversifying market and potential for semiconductor suppliers beyond the traditional X86 architecture. The steady growth in X86 servers, expected to reach $117.8 billion, remains a significant driver for semiconductor demand, given the pervasive use of X86 servers in enterprise and cloud environments.

Data Growth Driving Demand in Semiconductor-Dependent Data Centers

The exponential growth in data creation and replication, with an expected compound annual growth rate (CAGR) of 23% from 2020 to 2025, sets the stage for a significant surge in demand for data center processing power. The projection of 175 zettabytes of global data by 2025, nearly half of which is anticipated to be stored in public cloud environments, underscores the need for robust data processing and storage capabilities.

This trend is a substantial tailwind for the semiconductor industry, especially for manufacturers of high-performance processors and memory chips that form the backbone of data centers. The growth of data from IoT devices, which is expected to reach 90 zettabytes by 2025, will further bolster this demand, as processing this data in real-time requires substantial computational resources.

The financial forecasts for the data storage market, expected to reach USD 777.98 billion by 2030, and the public cloud services market, which is projected to constitute over 45% of all enterprise IT spending by 2026, highlight the vast market opportunity for semiconductor companies. The cloud storage market's estimated growth to USD 472.47 billion by 2030, with a specific CAGR of 25.18% from 2022 to 2028, indicates a robust expansion of infrastructure that is heavily reliant on advanced semiconductor technologies.

As the need for cost-effective, high-capacity, and secure data storage rises, so does the demand for semiconductors that enable these services. This environment presents a fertile ground for innovation, investment, and competition within the semiconductor industry, positioning it as a critical enabler of the digital economy's data-centric future.

Forecast and Valuation

Despite AMD's strategic positioning and consistent innovation, there remains an underestimation of its potential, particularly regarding its growth prospects and stock value. The market has yet to fully recognize AMD's robust adaptations in the data center and AI segments, its resilience in the client and gaming sectors, and its expansive role in the ever-growing semiconductor industry. This oversight overlooks AMD's ability to capture significant market share and drive revenue growth in key technological areas.

As the broader market begins to acknowledge AMD's strategic adaptations and innovative product pipeline, coupled with expanding demand across multiple sectors, it is poised for substantial stock growth and enhanced market presence. This underappreciation presents a unique opportunity for investors, as AMD is well-positioned for material growth and stock appreciation, driven by its strategic initiatives and the burgeoning semiconductor market.