Advanced Micro Devices (NASDAQ:AMD) stock rose almost 5% in the 24 hours after it completed the $50 billion acquisition of Xilinx.
Xilinx was known for inventing Field Programmable Gate Arrays (FGPAs), chips, which can be pre-programmed with software. It had over half the programmable chip market.
Like AMD and Nvidia (NASDAQ:NVDA), Xilinx is fabless. That is, it doesn’t manufacture chips, just designs them. Like AMD, it uses Taiwan Semiconductor (NYSE:TSM), known as TSMC, as a foundry.
Why Analysts Cheered
Approval of AMD’s deal comes shortly after Nvidia was forced to abandon its acquisition of ARM Holdings from Softbank (OTCMKTS:SFTBY). The original transaction price was $35 billion, based on AMD’s stock price at the time, valuing Xilinx at about 11 times revenue.
Xilinx was profitable at the time of the deal, but net income had fallen for two years in a row, and fiscal 2021 revenue was slightly below that of fiscal 2020. Xilinx’ fiscal year ran from April to March. Due to the ongoing chip shortage, however, 2022 was shaping up to be another growth year, with revenue for the first three quarters just short of the previous year’s total.
The deal values each Xilinx share at 1.7234 AMD shares. In its news release on the transaction, AMD hailed growth in its “Total Addressable Market” (TAM), previously $80 billion, which it now estimates at $135 billion. On the cost side, the deal also doubles the number of AMD employees in India.
Analysts were enthusiastic, believing that combining the two companies’ designs make a whole greater than the sum of its parts. Xilinx becomes the Adaptive and Embedded Computing unit of AMD, with new markets in automotive, aerospace and industrials. Former Xilinx CEO Victor Peng will continue to run the group. Like AMD CEO Lisa Su, he’s a native of Taiwan, and had been at AMD before joining Xilinx a decade ago.
Bad News for Intel
If there is a loser in all this, it’s Intel (NASDAQ:INTC).
Intel had bought Altera seven years ago to compete with Xilinx. But the former Altera was recently losing share for the same reason Intel was falling behind AMD, namely TSMC’s superior manufacturing. The solution in both cases is the same, matching TSMC’s Extreme Ultraviolet (EUV) process technology in chips with lines closer than 10 nm apart. Both Intel and TSMC are investing heavily in new chip foundries.
Over the last few years, embedded technologies have been merging with graphics processing. Recently, Xilinx had been doing especially well in the data center business, an area of emphasis for AMD. Its designs are expected to boost AMD there, as well as help its Radeon graphics cards compete with those of Nvidia.
I am a long-time fan of AMD CEO Su, but so is most of Wall Street. I recommended AMD in August and suggested you could pick it up for less by buying Xilinx stock.
Bottom Line on AMD Stock
The semiconductor “super cycle” shows no signs of abating.
Chips no longer go just into PCs, phones, and servers. They’re found in any product whose controls interact with its environment. Xilinx let this software be embedded into products through single chips, invisibly.
But this integration of products, like cars, with the computing environment is now becoming tighter. It makes AMD’s acquisition of Xilinx, like Intel’s of Altera, make sense for customers as well as suppliers.
This will not, however, immediately alleviate the ongoing chip shortage. That still depends on TSMC and Intel increasing their manufacturing capacity. Until then, profits will continue rolling in from every side.
On the date of publication, Dana Blankenhorn held a long position in NVDA, INTC and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack.