Last October, Advanced Micro Devices, Inc. (AMD) announced the decision to acquire Xilinx, Inc. (XLNX), with the goal of expanding its technology portfolio. The $35 billion all-stock transaction was approved by the shareholders of both companies on April 7, and the next step is regulatory approval.
According to an announcement by AMD, the deal is likely to close before the end of this year. A careful evaluation of the combined business suggests AMD is well-positioned to report stellar earnings growth in the coming years, and the stock is trading in undervalued territory as well.
Xilinx Will Open New Doors
To understand how Xilinx will add value to AMD’s existing business, one needs to consider the technical aspects of the semiconductors manufactured by both companies. Xilinx is a global leader in designing field-programmable gate arrays, which are commonly referred to as FPGAs. Unlike microprocessors that come out of factories, the chip structure of FPGAs can be changed even after the unit is packaged, and this adds a degree of flexibility to these chips. Such chips were used in the very early days of the internet as well, but microprocessors took over as FPGAs proved to be too slow and too complicated.
Over the last few years, Xilinx has done a remarkable job of bringing down the costs of producing FPGAs even when chips are produced at a small scale. What’s more, the company has reinvented the technological aspects to substantially improve the performance of its chips.
The requirements of product designers are changing rapidly as a result of the widespread adoption of cutting-edge technologies such as artificial intelligence and 5G, but microprocessors lack the flexibility to cater to these changing requirements. FPGAs, on the other hand, can be customized according to the specific requirements of the designer.
With this in mind, it is easy to see why the deal will open many doors for AMD, especially when it comes to the data center segment, which is rapidly evolving. According to data from AMD, the acquisition of Xilinx will increase its addressable target market opportunity from $79 billion to $110 billion. In addition, the company will realize both revenue and cost synergies as a result of the expected business combination.
AMD Poised To Gain Share In PC Market
The company relies on Taiwan Semiconductor Manufacturing Company (TSM) for the designing of its chips, and this business relationship has helped AMD gain market share in the PC space. Intel Corporation (INTC), the largest player in the PC chip space and AMD’s main rival, has yet to introduce its 7nm chips whereas AMD, thanks to its relationship with TSM, has been offering 7nm chips for well over a year now. By the time Intel finally launches 7nm chips, AMD will be on track to introduce 5nm chips as well. This technological advantage will help AMD gain market share in the mature PC market in the coming years.
Analysts Weigh In
Raymond James analyst Chris Caso initiated coverage of Advanced Micro Devices on April 15, assigning the chipmaker a Buy rating and a price target of $100 (24% upside potential). According to the analyst, Intel’s focus on in-house chip production will give AMD an edge as the latter is already ahead of the production curve.
Turning to the rest of the Street, AMD’s Moderate Buy consensus rating breaks down into 13 Buys, 5 Holds and 1 Sell. At $104.44, the average analyst price target suggests 30% upside potential. (See Advanced Micro Devices stock analysis on TipRanks)
Takeaway
Advanced Micro Devices will acquire Xilinx in an all-stock transaction valued at $35 billion. This acquisition will help the company grow its presence in the data center industry, and AMD is likely to be the go-to solutions provider of product designers who are concerned about the flexibility of chip infrastructure.
The company is positioned to capture PC market share as well, and its edge over Intel is likely to remain a feature at least through the end of 2025. AMD seems attractively priced in the market today, and the expected rollout of 5G technology will drive considerable growth.
Disclosure: On the date of publication, Dilantha De Silva did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
