Advanced Micro Devices (AMD -0.35%) had a terrible year in 2022. Consulting company Gartner says that the demand for a personal computer (PC) is in its steepest decline in two decades. Since PCs are a considerable part of its business, AMD has already started feeling the negative repercussions.
For instance, in early October, the company reported preliminary third-quarter 2022 revenue of $5.6 billion, $1 billion lower than it previously guided for in the second quarter -- yikes!
Today the stock is down 55% year to date. However, analysts project that trends like digital transformation will continue driving semiconductor industry growth from approximately $575 billion in 2022 into a trillion-dollar industry by 2030, and AMD would be a big beneficiary of that growth. So is AMD worth investing in at current prices, or is the PC market only at the beginning of a significant collapse that will drag the company down?
Let's investigate.
Is the PC market in secular decline?
For most of its history, the PC market has been cyclical. When the economy was good, sales were excellent, and when the economic cycle declined, PC sales turned sour. A significant portion of the current collapse in PC sales is due to cyclical repercussions from the pandemic. However, some worry that PC sales might not bounce back when the economy turns positive again. Why?
The PC market peaked in 2011 at 365.4 million units shipped and then dropped like a rock. While the industry recovered between 2019 and 2021, some believe the market is in a long-term secular decline, with the industry slowly dwindling. If true, that is a disaster for PC manufacturers and component suppliers.
The PC industry has two significant long-term issues. First, as chips have increasingly become more powerful, consumers have gone longer without upgrading. For instance, if you use a computer for emailing and surfing social media, you might never need to upgrade from current PC models -- the hardware is good enough. Second, consumers shifted their habits from computing on PCs to using mobile phones and the cloud.
If all AMD manufactured were chips for PCs, it might be in serious trouble. However, AMD manufactures chips for other purposes that are flourishing.
AMD is a powerful player in the data center market
AMD's source of dominance in the data center market is that every data center uses central processing units (CPUs) based on x86 computing architecture. And it is one of only two companies, along with Intel, with a license to manufacture chips based on x86 -- a decisive competitive advantage.
Today, AMD's only real competitor in the data center market is Intel. Recently, AMD developed a new innovative chip design that produced better power and greater efficiency. And AMD's foundry partner, Taiwan Semiconductor Manufacturing Company, surpassed Intel in process technology due to Intel's management decisions and manufacturing problems. Consequently, AMD's "Genoa" Epyc 9004 server processor has exceeded Intel's Xeon chip's capabilities.
What's excellent for AMD is that it is already gaining share from Intel in the data center market. AMD's third-quarter earnings showed that its data center business grew 45% over the previous year's comparable period to $1.6 billion. In contrast, Intel's Datacenter and AI Group saw revenue drop 27% to $4.2 billion during the same period.
The best part is that the data center segment is one of the company's most profitable areas, producing 31% operating margin in the third quarter of 2022.
AMD enters another high-growth business
In February 2022, the company diversified its portfolio by finalizing the acquisition of Xilinx, which now makes up most of what AMD calls the Embedded segment: networking, edge, and industrial infrastructure solutions. Through this acquisition, it has a presence in some of the most rapidly growing areas of the semiconductor market, such as automotive.
Xilinx builds field programmable gate arrays (FPGAs), integrated circuits that customers can configure after manufacturing, an advantage over most semiconductors hard-wired to perform only one task. Xilinx controls over 60% of the worldwide FPGA market. And since different FPGA manufacturers use incompatible programming software, tools, and design environments, customers often are reluctant to switch providers. This is a huge reason that Xilinx can vigorously defend its FPGA market share.
In the third quarter, Xilinx produced revenue of $1.3 billion at a 49% operating margin -- the company's most profitable segment and one of its fastest growing.
Time to buy a few shares
During 2022, depressed investors focused on a poor economy and a sagging PC market. However, in 2023, investors will likely begin noticing that AMD set itself up to continue eating into Intel's lucrative data center market share.
If you're looking for a growth company with a proven management team and excellent prospects over the next several years, AMD is one company you should strongly consider buying today.
