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This Massive Catalyst Could Supercharge AMD in the Long Run

By Harsh Chauhan – Aug 15, 2021 at 6:25AM

Key Points

  • AMD's data center GPU revenue doubled last quarter.
  • The ramp-up of its latest-generation data center graphics cards could help AMD sustain its momentum in this market.
  • AMD's data center GPU business is very small right now, but the end-market opportunity indicates that it could become huge in the long run.

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The tech company has started making progress in a lucrative market that could add billions to its revenue.

Shares of Advanced Micro Devices (AMD 5.78%) jumped to all-time highs at the beginning of August driven by the chipmaker's blowout earnings report, which revealed a massive surge in its revenue and earnings.

The tech company's revenue nearly doubled year over year, and adjusted earnings soared 250% as the company benefited from market share gains in the client CPU (central processing unit) and server processor markets. The terrific demand for the new generation of gaming consoles also gave AMD a big shot in the arm. However, there was one small detail discussed in the company's latest earnings conference call that indicates it is on track to win big from another multibillion-dollar opportunity -- the data center GPU (graphics processing unit) market.

Let's see why this space could be a big deal for AMD.

a person wearing classes types on a laptop in a data center facility.

Image source: Getty Images

AMD's data center graphics business has finally stepped on the gas

According to AMD CEO Lisa Su, the company's revenue from sales of data center GPUs "more than doubled year over year" in the second quarter. Su credited the segment's terrific performance to an increase in deployments of the company's Instinct accelerators, which also included the initial shipments of its latest data center graphics cards based on the CDNA 2 architecture.

It is worth noting that AMD has been struggling in the data center graphics market. Su defined the business as being "lumpy" in the fourth quarter of 2020, as AMD was catering to a small customer base. What's more, the segment's revenue was down in 2020 compared to the previous year.

In the first quarter of 2021, AMD pointed out that its data center GPU revenue increased sequentially. AMD said that the business is set up for revenue growth in the second half of the year as it ramps up the production of its next-generation chips, which will be used by high-performance computing (HPC) customers.

The big jump in data center GPU revenue last quarter could be a turning point for AMD in this segment. Things are likely to get better from here, as AMD has started shipping its Instinct MI200 "Aldebaran" compute GPUs based on the CDNA 2 architecture. The Instinct MI200 chips will be powering Frontier, which is touted as being the first exascale-class supercomputer in the U.S., and can solve calculations 50 times faster than other supercomputers today.

The good part is that the CDNA 2-based data center GPUs will be powering other supercomputers as well, such as Pawsey and LUMI. These wins could serve as a statement for AMD's new data center GPUs and pave the way for more design wins, especially considering the massive leap in performance that the CDNA 2 architecture delivers. According to Su:

CDNA 2 represents a major step forward in our multiyear data center GPU strategy, delivering more than twice the performance of our current generation and significantly higher performance than competitive offerings in HPC workloads.

A multibillion-dollar opportunity lies ahead

AMD doesn't exactly point out how much revenue it gets from the data center GPU business. But the chipmaker indicated earlier this year that its first milestone would be to get to $500 million in annual revenue from this segment. So data center cards are a minuscule part of AMD's business right now -- the company generated $3.85 billion in sales last quarter, while its trailing-twelve-month revenue is just over $13.3 billion.

But AMD believes it is on track to achieve that target, and estimates that data center GPU revenue could double in 2021. What's more, AMD believes that data center GPUs could become a "more meaningful driver" in 2022 and beyond. Su also describes the data center GPU business' trajectory "as sort of the early innings of what we did on the CPU side."

This should give investors confidence in the data center GPU segment's prospects. AMD's CPU business has taken off impressively over the years, with the company's x86 CPU market share jumping from less than 18% at the end of 2016 to an estimated 44% last quarter. A similar performance in the data center graphics card market could add billions of dollars to AMD's revenue in the future.

That's because the data center GPU market is expected to clock a compound annual growth rate of 43.5% through 2026, generating $26.2 billion in revenue at the end of the forecast period as per a third-party estimate. AMD could win big from this opportunity if it can sustain its newly found momentum and clock respectable market share in the long run, adding yet another growth driver to its portfolio that could play an important role in helping it remain a top growth stock in the future.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.

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