What Does the Potential AMD-Xilinx Deal Mean for INTC & NVDA?

·6 min read

Advanced Micro Devices AMD is reportedly interested in acquiring Xilinx XLNX, a pioneer in field-programmable gate arrays (FPGAs) chips, according to a Wall Street Journal (WSJ) article, citing people familiar with the matter.

Per the report, the two companies are in advanced talks and a deal could be finalized as soon as this week. The deal is touted to be worth $30 billion, reflecting a 16% premium to the stock’s Oct 8 closing price. Shares of AMD fell 3.9% last Friday following the report, while Xilinx stock rallied more than 14%.

Strategic Story: AMD Betting Big

AMD has been strategically strengthening presence in the microprocessor market against Intel INTC.

Despite its late entry, AMD has attained the position of a major player in the microprocessor and graphics processing markets. The company started small, targeting the low-end segment and gradually built a position for itself. AMD has had a very rough time owing to strength and market position of its two primary competitors Intel and NVIDIA NVDA. While Intel still reigns supreme in the microprocessor segment and has also strengthened its graphics capabilities noticeably, NVIDIA remains strong in the graphics market.

Year-to-Date Price Performance

AMD combined its own engineering talent with that of ATI (acquired in 2006 for $5.4 billion in cash and stock) to develop capabilities in both these areas.

The company has come a long way since. In fact, strength in 7 nanometer (nm)-based processors are expected to reinforce the company’s competitive position in the commercial and server market against Intel that currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, Intel’s chips utilize process technologies that are designed in-house. Meanwhile, AMD is currently leveraging Taiwan Semiconductor Manufacturing Company’s TSM 7 nm process technology, which is enabling it to deliver its advanced 7 nm chips faster to market.

Further, AMD aims to deliver “Zen 4” core architecture, which is “currently in design” utilizing advanced 5 nm process technology. This is a major concern for Intel, which is yet to deliver 7 nm chips.

Markedly, Intel noted delay in 7 nm process-based chips in its second-quarter earnings conference. The company has detected a defect mode in 7 nm process, which caused yield degradation. This is expected to favor AMD capture market share and challenge Intel’s dominance in the semiconductor market.

FPGA Bet Takes the Fight a Notch Higher

Now, AMD’s interest in Xilinx, which specializes in making FPGAs chips that can be reprogrammed and are primarily used in the communications, data center, industrial and defense applications, is anticipated to intensify the competition with Intel in the FPGA market.

Per MarketsAndMarkets data, the global FPGA market is anticipated to hit $8.6 billion by 2025, from $5.9 billion in 2020, at a CAGR of 7.6% between 2020 and 2025.

Markedly, Intel entered in the FPGAs solution space through the acquisition of Altera for $16.7 billion in 2015. After acquiring Altera, Intel has been developing high-end high-performance next-generation 14 nm FPGA chips by utilizing its 14 nm trigate transistor technology. Notably, Microsoft MSFT has selected Intel's FPGAs to power new Bing intelligent search features using real-time AI.

The semiconductor giant’s investments in FPGA for acceleration (dramatically increases performances at low power), and memory to reduce latency and increase speeds are helping it develop custom solutions for big players. Further, FPGA-focused eASIC acquisition in 2018, is also aiding it in strengthening position in the networking segment.

Synergies from Data Center Strength Hold Promise

Xilinx has been making every effort to strengthen its foothold in the data-center market. In the last few years, the company has launched several Alveo AI accelerator cards, which it claims provide high-performance for data-center applications, including real-time machine learning, video processing, genomics, and data analytics.

The performance of Xilinx’s AlveoAI accelerators is considered as powerful as NVIDIA’s data-center graphic processing units (GPUs). Therefore, the buyout would also provide AMD with enough arsenal to compete with Intel and NVIDIA in data-center market.

Markedly, AMD’s strength in its second-generation EPYC processors is helping it gain huge market share in the x86 servers’ industry. Nevertheless, NVIDIA's acquisition of ARM Holdings might aid the acquirer to provide full stack CPU-GPU offering, which is likely to act as a headwind for AMD.

Thereby, the bet on Xilinx, makes sense, as it will play a two-way role in enabling AMD not only to explore the rapidly growing FPGA space but also fortifying presence in data-center market, which is benefiting from coronavirus crisis triggered cloud computing boom.

Analyzing Cash & Debt Dynamics

AMD, currently carrying a Zacks Rank #3, as of Jun 27, 2020, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $13.53 billion compared with $20.8 billion as of Mar 28, 2020. Total debt as of Jun 27, 2020, was $38.35 billion compared with $39.92 billion as of Mar 28, 2020.

Notably, total debt to total capital of 12.9% is much lower than the industry’s figure of 44.2%. Further, times interest earned is 10.6X, compared with the industry’s figure of 4.8X. The strong cash balance can aid the company to pursue strategic acquisitions and other investments in growth initiatives. Moreover, on Sep 11, AMD announced that its senior unsecured credit rating was upgraded to investment grade Baa3 by Moody’s Investors Service.

AMD is looking to deleverage its balance sheet, and it seems like the company might opt for a cash and stock deal to pursue Xilinx acquisition, if the rumors materialize.

In this backdrop, it worth taking a look at Xilinx’s balance sheet. The company exited the fiscal first quarter, ending Jun 27, 2020, with cash, cash equivalents and short-term investments of approximately $3 billion compared with the prior quarter’s $2.27 billion sequentially. The company’s total long-term debt increased to $1.49 billion as of Jun 27, from $747.1 million as of Mar 28. This upswing reflects senior notes issuance of $750 million in May.

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