InvestorPlace contributor Vince Martin recently suggested that Broadcom (NASDAQ:AVGO), a company with a well-known appetite for buying fellow chip companies, could be a potential acquirer of processor and graphics specialist Advanced Micro Devices (NASDAQ:AMD) now that Broadcom's attempted takeover of Qualcomm has been thwarted.
Though Broadcom has acquired a lot of companies in the past and has made it clear that it continues to be interested in buying more chip companies (should, of course, the opportunities present themselves), Broadcom doesn't buy companies or business assets indiscriminately.
Instead, the company tends to buy companies that fit a specific profile. Indeed, Broadcom likes companies that have product franchises that generate significant profit. It also likes businesses that are either market share leaders in or very close No. 2 players with the potential to be leaders going forward.
Considering that, I don't think AMD would be a company that Broadcom would be interested in today. Here's why.
A distant No. 2 in most areas
AMD makes its money selling processors that go into personal computers, data centers, and embedded applications, as well as graphics processors that go into the same basic areas.
While AMD's technology position in these markets has improved -- and, in the case of CPUs, improved dramatically -- over the years, the reality is that in terms of market share AMD is a distant second in its core businesses.
For some perspective, AMD's computing and graphics segment -- which includes sales of PC processors and graphics processors -- generated about $3 billion in revenue during 2017. This represented strong growth from the roughly $2 billion that it saw in the prior year, but for some perspective, AMD's main rival in PC processors, Intel (NASDAQ:INTC), saw its client computing group (CCG) business generate about $34 billion in revenue during 2017.
AMD's biggest rival in graphics processors, NVIDIA (NASDAQ:NVDA), generated $8.1 billion in sales of graphics processors alone.
Moreover, while Intel and NVIDIA enjoy corporate gross profit margin percentages in the 60%-plus range, AMD's overall gross profit margin percentage during 2017 was 34%. Part of that low number is due to the fact that a large portion of AMD's overall business comes from sales of relatively low-margin game console chips, but it's also clear that AMD can't command the margins that either Intel or NVIDIA can.
Broadcom likes to buy leaders or companies within spitting distance of leadership, but AMD is the clear underdog in most of the markets that it serves.
Not profitable enough
Even after a big growth year in 2017, AMD's profitability remained relatively low. On $5.33 billion in revenue, AMD generated just $43 million in net income (which, for some context, was a dramatic improvement over the significant losses AMD had seen for many years prior).
Broadcom doesn't like to buy marginally profitable companies or assets with the intention of trying to make them significant cash machines at some point in the future -- it likes businesses that generate significant profits right now.
Although AMD's business appears to be on the upswing (current analyst estimates call for AMD to generate $6.28 billion in revenue this year and $0.38 per share in net income -- a big jump from $5.33 billion and $0.04 in the prior year, respectively), I don't think that Broadcom would view AMD's current profitability as anywhere close to enough.
Keep in mind that Broadcom's goal is to generate an overall corporate gross profit margin of at least 60% and operating margin of at least 40%. AMD is a long way off from generating those kinds of figures, and Broadcom isn't the kind of company to buy an asset with the intention of waiting a long time for it to fit the business profile that it desires.
Don't bet on a Broadcom buyout
Ultimately, AMD doesn't seem like a good acquisition target for Broadcom -- it doesn't have the market position that Broadcom wants for each member of its business portfolio, nor does it generate the kind of gross/operating profit margins that Broadcom demands of its businesses.
Ashraf Eassa owns shares of Advanced Micro Devices, Intel, and QCOM. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool owns shares of QCOM. The Motley Fool recommends Broadcom Ltd and Intel. The Motley Fool has a disclosure policy.