Advanced Micro Devices (AMD 2.19%) completed the $49 billion acquisition of Xilinx in February this year, which gave the former's first-quarter results and full-year outlook a huge shot in the arm.
AMD's first-quarter revenue jumped 71% year over year to a record $5.9 billion, with the contribution from Xilinx coming in at $559 million. AMD also pointed out that Xilinx's pro forma revenue during the quarter came in at $1 billion for the full quarter, an increase of 22% over the prior-year period. So Xilinx is going to move the needle in a big way for AMD in 2022, which is evident from the company's guidance for a 60% increase in full-year revenue to $26.3 billion.
AMD was earlier anticipating its 2022 revenue to increase 31% to $21.5 billion on the back of growth across all its businesses. More importantly, this acquisition is going to unlock a massive multi-year opportunity for AMD that could supercharge its growth in the long run. Let's see how.
Xilinx could give AMD a nice long-term boost
Xilinx will now form AMD's adaptive and embedded computing group (AECG). This segment will include sales of field-programmable gate arrays (FPGAs), adaptive system-on-chips, and adaptive compute acceleration products. These products are witnessing healthy demand, which is evident from the 22% increase in Xilinx's fiscal 2022 revenue (for the period ending on March 26) to $3.9 billion.
More specifically, Xilinx's chips are deployed in multiple fast-growing verticals such as data centers, 5G infrastructure, aerospace, defense, and automotive. AMD estimates that the Xilinx acquisition will expand its total addressable market in the data center, automotive, communications, and embedded system-on-a-chip (SoC) end-markets to $105 billion in the long run. Xilinx already has a solid portfolio of clients that will allow AMD to tap into the massive end-market opportunity.
For instance, Xilinx's chips are already in use across 10 of the largest hyperscale data center operators, including the likes of Alibaba, Amazon, IBM, Microsoft, and Tencent. The hyperscale data center market is expected to clock an annual growth rate of 15% through 2027, according to a third-party estimate. As FPGAs play an important role in accelerating data center workloads, it is not surprising to see that sales of these chips could hit $11.4 billion in 2027 from $5.7 billion in 2020.
Given that Xilinx is the dominant player in the FPGA market with an estimated 60% market share as per third-party estimates, AMD's growth could get a nice shot in the arm. Meanwhile, the 5G wireless infrastructure market is going to be another key growth driver for AMD, as Xilinx supplies its chips to six of the top seven wireless equipment manufacturers. These include the likes of Cisco, Nokia, Samsung, NEC, and Fujitsu, among others. With the 5G infrastructure market expected to grow at an annual pace of 68% through 2030, this could turn out to be another key growth area for AMD thanks to its acquisition of Xilinx.
Coming to the automotive business, Xilinx's chips are used to power a wide range of applications such as the infotainment system, automated parking, advanced driver-assistance systems (ADAS), and external sensors and cameras for self-driving applications. What's more, AMD points out that Xilinx's chips have been selected for use by popular automotive OEMs (original equipment manufacturers) and component suppliers such as Continental, Daimler, Subaru, and Tesla, among others.
All of this indicates that AMD's acquisition of Xilinx could turn out to be a terrific move in the long run thanks to the latter's impressive clientele and the huge addressable revenue opportunity.
A big reason to buy the stock
Xilinx and AMD have together identified revenue opportunities worth $10 billion spread across the various end markets, and that's expected to increase substantially in the long run, as discussed earlier. Given that AMD expects to generate just over $26 billion in revenue this year, the Xilinx acquisition means that its top line is on track to grow big time in the future as both companies capitalize on the opportunities at hand.
Investors should also note that the Xilinx acquisition is expected to positively impact AMD's bottom line. That's because AMD's adjusted gross margin in the first quarter stood at 51% on a stand-alone basis, up 4.8 percentage points year-over-year. Including Xilinx, AMD's non-GAAP gross margin was 53% last quarter. So Xilinx will not only drive robust top-line growth for AMD, but it will also give the company's earnings growth a nice boost.
Analysts are expecting AMD's earnings to grow at an annual rate of nearly 33% a year over the next five years, but with the Xilinx acquisition coming into play, it wouldn't be surprising to see it grow at a faster pace and remain a top growth stock in the long run.
