AMD Has Room for Improvement (NASDAQ: AMD ) | Private Equity Weekly

AMD investment thesis

Since my last post AMD (NASDAQ:AMD), where I say the company is undervalued and the stock has good performance. The basic assumptions still hold: Nvidia Corporation (NVDA) and AMD are well ahead of the competition, while TSMC has high barriers to entry in terms of knowledge and capabilities (TSM), also known as TSMC, protects them from competition.

In fact, Nvidia now Use small chips What’s included in the Blackwell series shows that AMD made the right decision long ago to focus on this technology and gain experience.It also shows that AMD continues to lead in double precision and Nvidia has a clear lead in low precision compared to the AMD MI300X Accelerator for Nvidia B100, B200 and GB200 models.

However, AMD still needs to catch up when it comes to software, which is Nvidia’s current competitive advantage. However, if AMD can catch up in the future, its prospects may improve further.

AMD’s ROCm and Nvidia’s CUDA

If we only look at the GPU market, AMD is not just about GPUs (a lot of people tend to forget this), then the battle between CUDA and ROCm is probably a very important thing to fully understand.

Now Prices have normalized Sort of, availability is good, with most used models coming back below list price, except for very popular models, or new models available at list price. However, demand for Nvidia RTX 4090s is still very high, and it’s still very difficult to get them at list price and with good delivery times. But since all other GPUs from Nvidia and AMD are in sufficient supply and demand can be met, the shortages of the past few years are over.

Therefore, the consumer graphics card market has not changed much. AMD remains the choice for customers who want more bang for their buck, while Nvidia is for those who need maximum performance.

However, the situation is different for Nvidia’s h model and AMD’s MI model. These products are in high demand, and AMD’s advantage is that MI has better availability, which is often cited as the reason why customers choose AMD products.

But now we come to the interesting part, which is Nvidia’s current platform competitive advantage is called CUDA, and AMD is trying to attack it. CUDA has been around since 2007 but was not successful Challenged by AMD Working with Close to Metal in 2008 and then with HSA. Since 2016, they have tried to challenge CUDA with ROCm and HIP, which should make porting CUDA code easier. So HIP is a kind of emulation layer, but of course you could argue that there is more and better CUDA code out there, so the emulation layer is used to make as much code as possible available to users of the rest of the ecosystem.

Another translation layer is called ZLUDA has been banned, as you can see from the new EULA in the CUDA file. Furthermore, as we can see, in this competition, some players realize the importance of becoming a dominant player in the software/ecosystem space and try to maintain their competitive advantage.Additionally, customers are divided on whether they prefer open source solutions or are satisfied with the status quo because Nvidia is first to support The machine learning community while others ignore it.

The main advantage of CUDA is that it performs Perform better in benchmark tests Even for home users, it’s relatively easy to get up and running. However, it should be noted that AMD’s focus for ROCm is really on supercomputers, so it looks like consumer cards are being treated as an afterthought, even though they do have support. It’s often said that Nvidia offers longer support, but older AMD cards can often use newer drivers, even if they’re no longer in the test pool.

But currently CUDA still maintains the largest competitive advantage. AMD has said ROCm will be a focus in 2024, so it’s still interesting. Especially with supercomputers like Frontier and EL Capitan running on ROCm, there have been no reports of bad experiences, which means AMD is definitely getting stronger in the supercomputer space, which is sometimes impossible to convey.

I think there is room for improvement and AMD should focus more on communication, how ROCm is used, how the supercomputer is used and how successful it is because I think the software is better perceived than it is sometimes. For example, one of Nvidia’s strengths is that CEO Jensen Huang is an excellent salesperson and communicator.

Impact on other industries

In my opinion, it’s always interesting to see the impact on other industries, as this can sometimes indicate which areas might be worth investing in. Most people should be aware that Intel Corporation ( INTC ), AMD, Nvidia, and even Apple ( AAPL ) are competing for TSMC’s capacity, but there will also be strong demand for high-bandwidth memory, a market dominated by Samsung ( OTCPK:SSNLF ) and SK Hynix dominates, with Micron Technology (MU) also holding a small share. The HBM3E will be very popular in the future, and thanks to the new Blackwell GPUs, so will the small die.

I also believe that liquid cooling and the provision of low-cost energy in data centers will benefit greatly from the AI ​​trend. Artificial intelligence chips used in smartphones and artificial intelligence personal computers are also likely to see strong growth.

In addition, AI chip startups such as SambaNova Systems, Cerebras Systems and Groq may also be interesting.Some of them focus on training and inference-as-a-service, which they have proven Impressive results achieved in demo. What’s special about Groq is that they No need for HBMand does not rely on TSMC’s production capacity.

Current status of China’s microprocessor market

There’s been a lot of talk in recent days about China banning the use of Intel and AMD chips in government computers. AMD could lose hundreds of millions of dollars in revenue.But the fact is that AMD CEO Meet Lisa Su China’s Commerce Minister Wang Wentao has received relatively little attention. This may indicate that AMD’s sales in China may unexpectedly increase over time.

Overall, I think AMD and Intel microprocessors are the best at the moment, so even if the government stops using them, it won’t have much impact on the Chinese business because Chinese customers also want to use the best technology.

Valuation

AMD is the most expensive company among its peers on a forward P/E basis, although the growth opportunities justify a P/E ratio of 49x. Additionally, I think expected earnings may be on the low side, as I think the magnitude of the MI300X impact is quite conservative and AMD may surprise with higher-than-expected earnings later this year.

Therefore, I think the market is still underestimating AMD’s revenue or earnings.

What will earnings per share look like in two years?

For fiscal 2025, EPS estimates from 38 analysts range from $3.52 to $9.05, with the average estimate being $5.48. TTM currently has earnings per share of $0.53, so analysts see plenty of upside potential.

I think these estimates tend to be conservative, and AMD’s new products may cause these estimates to be revised higher later this year. To me, $7.50 EPS (30x to 35x P/E) is realistic by December 2025, which would mean a share price of $225 to $262.

In addition, AMD’s debt position remains healthy, with $5.3 billion in cash and short-term investments, while long-term debt is only $1.7 billion, which protects AMD’s downside. So I think AMD continues to be well positioned for the future.

AMD’s ROI

AMD’s return on capital continues to rise, and as investments come to fruition, the company should soon return to the high double-digit returns of the past. Regardless, I wouldn’t be surprised to see them rise significantly in the coming quarters.

in conclusion

AMD’s dominance in two of the most important industries going forward (the CPU and GPU markets), combined with a healthy balance sheet, should put the company in a good position going forward. If they combine this with software improvements and better communication, the future looks brighter.

Therefore, given AMD’s potential and continued growth, it will likely remain the top choice in the near future.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.