The data center market has turned out to be a happy hunting ground for Advanced Micro Devices (NASDAQ:AMD) ever since the company reentered it in 2017 with its EPYC server processors.
The chipmaker has likely given Intel (NASDAQ:INTC) some sleepless nights since then, and AMD is showing no signs of slowing down. A recent report claims that AMD’s latest-generation Rome server processors have doubled their presence in Amazon‘s data centers quickly, which is not surprising considering the chipmaker’s technology advantage over Intel.
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However, this isn’t the only favorable development for AMD’s server processors in recent months. The company has scored other notable wins in the data center market — including the likes of Lenovo and NVIDIA — and the latest developments indicate that more OEMs (original equipment manufacturers) are turning to its server offerings.
AMD has hit 10% server market share ahead of schedule
AMD CEO Lisa Su pointed out during the latest earnings call that the company has met its “double-digit server processor market share goal.” Analysts had expected AMD to take until the end of the year to hit that mark, but it seems like the chipmaker needed just six months to more than double its server market share, which was 4.5% at the end of 2019, according to Mercury Research’s estimates.
This indicates that server OEMs and cloud service providers have ramped up the adoption of AMD’s chips this year. Technology news website CRN recently reported that Hewlett Packard Enterprise is enjoying “major price-performance advantages” in its virtual desktop infrastructure applications.
According to HPE, the deployment of AMD’s Rome server chips has slashed virtual desktop costs per worker in half. Similarly, Google has built its Confidential Virtual Machines platform using AMD’s second-generation EPYC processors and not Intel’s Xeon, citing advantages such as scalability and ease of use.
These rapid gains in the data center space have translated into strong financial growth for AMD. The company generated over 20% of its second-quarter revenue from data center products as sales of EPYC server processors more than doubled from the prior-year period. What’s more, the market share gains in server processors and other segments encouraged AMD to boost its annual guidance.
Not surprisingly, AMD stock has hit all-time highs in August, but the company could keep pushing the envelope, making an even bigger dent in the data center market and further boosting its top line.
Aiming for more data center gains
AMD was a big player in the data center space years ago. From 2004 to 2006, the company’s data center market share had zoomed from just 7% to a sizable 26%, as pointed out by Bank of America analyst Vivek Arya on the latest earnings call.
Replicating such market share growth in the next couple of years could give the company a huge top-line boost. The data center business produced about $1 billion of AMD’s total revenue last year. Last quarter, its contribution increased to more than a fifth of the total revenue, as discussed earlier, which translates into roughly $390 million given the total quarterly revenue of $1.93 billion.
So AMD’s data center business currently has an annual revenue run rate of approximately $1.5 billion — on track for a 50% improvement over 2019. The chipmaker expects data center-related products to supply more than 30% of its overall revenue in the long run, which means that it is gunning for further market share growth in this segment.
It wouldn’t be surprising to see AMD achieve that and take a bigger bite out of Intel’s pie as its next-generation Zen 3 server processors start shipping later this year. And according to AMD’s product roadmap, the company plans to release Zen 4 server processors based on a 5-nanometer (nm) manufacturing process by 2022.
Intel, on the other hand, has delayed its competing 7nm data center processors to 2023. This should give AMD an opportunity to corner more of the server processor market, which is expected to be worth $19 billion by then per the company’s estimates. So if AMD manages to increase its server processor market share to 20% by 2023, its data center revenue would quadruple compared to last year’s levels and help the company sustain its terrific growth.
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*Stock Advisor returns as of August 1, 2020John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and NVIDIA. The Motley Fool recommends Intel and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
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