Advanced Micro Devices is giving Chipzilla sleepless nights.

Key Points

  • AMDs share of the x86 CPU market has reached a 14-year high as Intel continues to retreat.
  • The server market drove the bulk of AMDs gains last quarter.
  • AMD still has a lot of market share to go after and boost its revenue in the long run.

Intels (NASDAQ:INTC) recovery in the x86 CPU (central processing unit) market at the end of 2020 now appears to be a flash in the pan. Intel had given investors hope that it could bring an end to Advanced Micro Devices (NASDAQ:AMD) consistent market share gains by ramping up production and catering to customers who were unable to buy the latters chips due to a supply shortage, but the latest numbers from Mercury Research prove otherwise.

AMD ate into Intels x86 market share in the second quarter of 2021, with its share now close to all-time highs. The bad news for Intel investors is that AMD isnt done chomping away at Chipzillas dominance. Lets see why.

Persons

Image source: Getty Images

AMD wins big thanks to the server market

According to Mercury Research, AMD held 22.5% of the overall x86 CPU market at the end of Q2, its highest share in the past 14 years. AMDs share increased an impressive 4.2 percentage points year year and 1.8 percentage points from the first quarter. Intel held the rest of the market.

AMDs market share gains were driven primarily by the server market. The chipmakers server market share increased 3.7 percentage points over the year-ago period to 9.5% in Q2. This isnt surprising, as AMDs latest generation of EPYC server processors is reportedly much faster than Intels offerings. AMD had claimed that its third-generation EPYC processors offer double the performance of their Intel counterparts.

Those claims are translating into real-world gains. AMDs EPYC server chips are gaining prominence in the worlds top 500 supercomputers. The chipmaker supplied 59% of the processing cores to new supercomputer systems in the top 500 list in June 2021, up from 46% in November of last year.

Additionally, AMD had pointed out in its July earnings conference call that server chip demand has accelerated on the back of growing internal workload adoption and nearly 50 new AMD-powered instances by Amazon Web Services, Microsoft Azure, Google, Tencent and Alibaba. The company further added that enterprise demand for its server processors is set to accelerate as more than 100 systems powered by its third-generation EPYC servers are in production from the likes of Dell, Hewlett Packard Enterprise, Lenovo, Supermicro, Cisco, and others.

More importantly, AMDs relentless pursuit of share in the server market is likely to get a shot in the arm when it launches its fourth-generation EPYC server chips, codenamed Genoa, based on a 5-nanometer manufacturing process next year. The fourth-gen server chips are expected to pack a maximum of 96 cores as compared to 64 cores in the current-generation chips, indicating a nice jump in performance.

Meanwhile, Intel had announced at the end of June that the launch of its next-generation Sapphire Rapids server CPUs has been delayed to the first quarter of 2022. Intels next-generation server CPUs will be based on a 10nm manufacturing process, which means that Chipzilla will be at a disadvantage when AMD launches its 5nm processors. Thats because a smaller node size will allow AMD to pack in more transistors and reduce power consumption, which will result in a higher core count and superior computing power.

The good part is that AMDs share of the server processor market is still quite small, as Intel commanded just over 90% of the space last quarter. That allows AMD to make big gains in this space in the future thanks to its technological advantage. Bank of America analyst Vivek Arya sees AMDs server market share jumping to 25% over the next 12 to 18 months, which would be more than double the current levels.

Gauging the financial gains

AMD sees a total addressable market worth $19 billion in server CPUs by 2023. The companys data center business (which is predominantly composed of server chips in 2020) cornered a high-teens share of its total revenue last year. AMD had generated $9.76 billion in revenue last year, which means that server CPUs produced less than $2 billion of its total sales (assuming the data center segment produced 19% of total revenue).

If AMD indeed goes on to capture 25% of the server CPU market by the end of 2022 as Bank of America forecasts, its revenue from this space could more than double (based on the addressable market figure mentioned above) in the next two years. More importantly, the pace of AMDs server growth and the product roadmap indicate that it can indeed go on to corner a fourth of the server CPU market and boost its top line.

Throw in AMDs gains in the notebook and desktop CPU markets, and it isnt surprising to see why the companys revenue and earnings are anticipated to explode in the coming years.

AMD

AMD Revenue Estimates for Current Fiscal Year data by YCharts

In all, AMD is sitting on multiple catalysts that could help it remain a top growth stock in the future, and investors would do well to buy it now given the sharp pullback in its share price over the past couple of weeks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Microsoft, and Tencent Holdings. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.

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