Advanced Micro Devices, Inc. (NASDAQ:AMD) stock has bounced up and down this year, and remains up 16.75% year-to-date.
AMD has had a very eventful year so far. The company presented the Ryzen brand of PC central processing units (CPUs) for desktops in February and the Epyc family of server CPUs in June. AMD also released the Radeon 500 and RX Vega series of graphics processing units (GPUs) this year.
Hence, after years of losses, AMD is in the midst of a turnaround.
In 2015, some observers claimed that AMD was on the road to bankruptcy and the stock bottomed out in February 2016 at around $1.80 a share. AMD stock rebounded and now trades at $13 a share.
AMD has grown revenue at an 18% rate year-over-year for two quarters now.
As mentioned in my previous article on the company, AMD is the only chipmaker that designs and produces both CPUs and GPUs. In both segments, it goes against the market leader — Intel Corporation (NASDAQ:INTC) in CPUs and NVIDIA Corporation (NASDAQ:NVDA) in GPUs.
Intel has long dominated the market for both PC and server CPUs, but AMD hopes that its Ryzen and Epyc processors will change this.
AMD wants to end Intel’s dominance and take back CPU market share. Doing so would give AMD a more predictable cash flow and reduce the stock’s beta, thereby lowering the company’s cost of capital and boosting margins.
A stronger AMD means more competition for Intel, which would put pressure on Intel to innovate more and keep prices down. This would benefit large-scale purchasers of CPUs, who are rooting for AMD’s success.
AMD Competing With Intel
AMD and Intel have competed in the CPU market for a long time; you can find articles about their price wars from 1997 and 2006. I discussed the dynamics of the industry, including the periodic price wars, in an article in August.
But a few years ago, AMD was a much weaker competitor and saw its pricing power erode. Prices for AMD chips fell while prices for chips from Intel remained steady. Some PC enthusiasts grumbled over Intel’s dominance and a lack of innovation in the market.
Now, AMD’s new products may shift the balance yet again.
AMD’s 32-core Epyc will compete with Intel’s Xeon line of server chips. In May, AMD’s Forrest Norrod claimed that virtual machines using Epyc compiled a Linux kernel in 15.7 seconds, versus 22 seconds for machines using Intel’s Xeon 2699A server chip.
And PC enthusiasts welcomed AMD’s new Ryzen chip for PCs, with some observers calling it their “best chip family in a decade.”
How did this impact Intel?
Intel cut prices on its Core line of processors in March. In April, Intel forecast a decline in PC chip prices due to Ryzen. In an effort to stave off AMD’s renewed challenge, Intel also created a new brand of high-end chips for gamers, the Core i9.
And Intel surprised observers when it unveiled its new Xeon server chips in July, claiming a 65% increase in performance over the previous generation. According to Lisa Spelman of Intel’s data center group, the Xeon “represents the best of our 20-year history of data center innovation.”
It looks like AMD is forcing Intel to step it up a notch.
Hardware Brands Reaching out to AMD
Hardware companies like Dell Technologies Inc (NYSE:DVMT) and HP Inc (NYSE:HPQ) want AMD to compete with Intel, and will gladly reward the company with more of their business. They want a counterweight to Intel.
Advanced Micro Devices, Inc. could certainly use a break; the global server and PC markets are shrinking. And their biggest customers, large datacenter operators like Facebook Inc (NASDAQ:FB) have been building their own servers for years.
These companies purchase chips for the servers and PCs they build, and will benefit from CPUs becoming cheaper and better.
AMD’s resurgence will force Intel to cut prices, boost innovation, or both. This could mean cost savings for device makers and customers and better performance for a lower price, making the end products (servers and PCs) more attractive to buyers.
AMD has struggled to show profits in recent years partly because the company focused more on the low-margin budget segment, with Intel dominating in high-end PCs and server chips.
But, now, AMD wants more of this high-margin business.
This is bad news for Intel and good news for its customers. Hardware brands and PC gamers will benefit, along with tech companies running their own datacenters like Microsoft Corporation (NASDAQ:MSFT) and Baidu Inc (ADR) (NASDAQ:BIDU).
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.