Intel's (INTC +4.85%) recovery in the x86 CPU (central processing unit) market at the end of 2020 now appears to be a flash in the pan. Intel had given investors hope that it could bring an end to Advanced Micro Devices' (AMD +3.47%) consistent market share gains by ramping up production and catering to customers who were unable to buy the latter's chips due to a supply shortage, but the latest numbers from Mercury Research prove otherwise.
AMD ate into Intel's x86 market share in the second quarter of 2021, with its share now close to all-time highs. The bad news for Intel investors is that AMD isn't done chomping away at "Chipzilla's dominance. Let's see why.
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AMD wins big thanks to the server market
According to Mercury Research, AMD held 22.5% of the overall x86 CPU market at the end of Q2, its highest share in the past 14 years. AMD's share increased an impressive 4.2 percentage points year year and 1.8 percentage points from the first quarter. Intel held the rest of the market.
AMD's market share gains were driven primarily by the server market. The chipmaker's server market share increased 3.7 percentage points over the year-ago period to 9.5% in Q2. This isn't surprising, as AMD's latest generation of EPYC server processors is reportedly much faster than Intel's offerings. AMD had claimed that its third-generation EPYC processors offer double the performance of their Intel counterparts.
Those claims are translating into real-world gains. AMD's EPYC server chips are gaining prominence in the world's top 500 supercomputers. The chipmaker supplied 59% of the processing cores to new supercomputer systems in the top 500 list in June 2021, up from 46% in November of last year.
Additionally, AMD had pointed out in its July earnings conference call that server chip demand has accelerated on the back of "growing internal workload adoption and nearly 50 new AMD-powered instances by Amazon Web Services, Microsoft Azure, Google, Tencent and Alibaba." The company further added that enterprise demand for its server processors is set to accelerate as more than 100 systems powered by its third-generation EPYC servers are in production from the likes of Dell, Hewlett Packard Enterprise, Lenovo, Supermicro, Cisco, and others.
More importantly, AMD's relentless pursuit of share in the server market is likely to get a shot in the arm when it launches its fourth-generation EPYC server chips, codenamed Genoa, based on a 5-nanometer manufacturing process next year. The fourth-gen server chips are expected to pack a maximum of 96 cores as compared to 64 cores in the current-generation chips, indicating a nice jump in performance.
Meanwhile, Intel had announced at the end of June that the launch of its next-generation Sapphire Rapids server CPUs has been delayed to the first quarter of 2022. Intel's next-generation server CPUs will be based on a 10nm manufacturing process, which means that Chipzilla will be at a disadvantage when AMD launches its 5nm processors. That's because a smaller node size will allow AMD to pack in more transistors and reduce power consumption, which will result in a higher core count and superior computing power.
The good part is that AMD's share of the server processor market is still quite small, as Intel commanded just over 90% of the space last quarter. That allows AMD to make big gains in this space in the future thanks to its technological advantage. Bank of America analyst Vivek Arya sees AMD's server market share jumping to 25% over the next 12 to 18 months, which would be more than double the current levels.
Gauging the financial gains
AMD sees a total addressable market worth $19 billion in server CPUs by 2023. The company's data center business (which is predominantly composed of server chips in 2020) cornered a high-teens share of its total revenue last year. AMD had generated $9.76 billion in revenue last year, which means that server CPUs produced less than $2 billion of its total sales (assuming the data center segment produced 19% of total revenue).
If AMD indeed goes on to capture 25% of the server CPU market by the end of 2022 as Bank of America forecasts, its revenue from this space could more than double (based on the addressable market figure mentioned above) in the next two years. More importantly, the pace of AMD's server growth and the product roadmap indicate that it can indeed go on to corner a fourth of the server CPU market and boost its top line.
Throw in AMD's gains in the notebook and desktop CPU markets, and it isn't surprising to see why the company's revenue and earnings are anticipated to explode in the coming years.
AMD Revenue Estimates for Current Fiscal Year data by YCharts
In all, AMD is sitting on multiple catalysts that could help it remain a top growth stock in the future, and investors would do well to buy it now given the sharp pullback in its share price over the past couple of weeks.
