Share prices of Advanced Micro Devices (AMD -1.42%) jumped 10% on Monday, Nov. 8, after the chipmaker announced that Facebook parent Meta Platforms (META -4.27%) has adopted its EPYC server CPUs (central processing units).
AMD stock closed the day at an all-time high as investors cheered the news, which isn't surprising as the new business could significantly boost the chipmaker's growth in the long run. Let's see why the adoption of AMD's server chips by Meta is going to be a big deal.
The metaverse could become a key growth driver for AMD
Facebook announced last month that it is going to develop a metaverse -- a virtual environment wherein people would interact as they do in their daily lives, allowing them to work, play, learn, and socialize just like the real world. This metaverse will require investments in software and hardware to create the virtual environment that Meta Platforms is planning.
Meta has decided to invest $150 million in training developers and creators so that they can make relevant applications for the metaverse, which will utilize the concepts of augmented reality (AR) and virtual reality (VR) to connect people in a virtual environment. Meanwhile, Meta seems to have taken one of its first steps to shore up the hardware side of things as well.
At AMD's Accelerated Data Center Premiere event, the chipmaker revealed that "Meta is the latest major hyperscale cloud company that has adopted AMD EPYC CPUs. AMD and Meta worked together to define an open, cloud-scale, single-socket server designed for performance and power efficiency, based on the 3rd Gen EPYC processor."
With this move, AMD has added yet another hyperscale cloud customer to its portfolio, which puts it into a stronger position to take advantage of a fast-growing niche. According to a third-party report, the hyperscale data center market could grow at nearly 27% a year through 2028. That's not surprising considering memory chips manufacturer SK Hynix estimates that hyperscale data center deployments are expected to double in the next four years.
Meta Platforms can now become a key contributor to the growth of the hyperscale data center market as it plans to invest $10 billion to shore up its AR/VR capabilities in 2021 itself. CEO Mark Zuckerberg had pointed out on the October earnings conference call that he expects "this investment to grow even further for each of the next several years." More specifically, Meta will be investing this money on "augmented and virtual reality-related hardware, software, and content."
AMD's partnership with Meta means that it now has another avenue to grow sales of its EPYC server chips and boost the performance of its enterprise, embedded, and semi-custom (EESC) segment.
What does this mean for investors?
The EESC segment accounts for sales of AMD's EPYC server chips. This segment has been on fire in recent quarters thanks to AMD's partnerships with Microsoft and Sony, which are using its semi-custom chips in their latest consoles, along with the growing demand for EPYC chips by supercomputers, cloud service providers, and hyperscale data centers.
AMD's EESC revenue shot up 69% year over year in the third quarter to $1.9 billion. EPYC server-processors played an important role in this jump as their sales more than doubled from the prior year. In fact, AMD has recorded six consecutive quarters of record revenue from sales of server processors. Don't be surprised to see EPYC sales head higher in the future as the likes of Microsoft and Alphabet's Google have announced new cloud instances powered by AMD's chips. Netflix, Cloudflare, and Vimeo have also increased their adoption of EPYC chips.
All of this indicates that AMD's EESC business can continue to clock high growth rates thanks to a double engine that comprises a fast-growing gaming console market and the server-processor market that now has an additional catalyst in the form of Meta. As a result, AMD can continue to remain a top growth stock as it seems capable of sustaining its hot rally considering recent developments.