Xilinx Will Carry The AMD Rocket Ship Again To Earth (NASDAQ:AMD)

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Not too long ago AMD (AMD) made a proposal to purchase Xilinx (XLNX), an FPGA (Area Programmable Gate Array) producer for about $35 billion in inventory. The thought is to mix AMD’s processors with Xilinx FPGA’s to supply a extra highly effective resolution for patrons.

That is similar to what Intel (INTC) did in 2015 when it purchased Altera, which on the time was the secondlargest FPGA firm behind Xilinx.

FPGA’s are mixture {hardware}/software program units that permit CPUs to run parallel operations, thus dashing them up and making them extra environment friendly. Since they’re “programmable” they are often modified on demand within the “discipline” by the consumer. They’re largely utilized in servers comparable to these utilizing AMD’s Zen Epyc chips.

I’ve written greater than 35 articles on AMD during the last 5 years, and for many of that point, I’ve been bullish on their prospects. And I’ve at all times been an admirer of AMD’s CEO Lisa Su.

However on this case, I see a reach-too-far as a result of Xilinx’s historical past is filled with ups and downs, and for AMD to maintain its inventory value going up over the subsequent 5 years, it wants constant, optimistic, high-growth outcomes and I do not see Xilinx doing that.

In one among my articles I outlined the case for AMD being overvalued (AMD: 100X P/E Ratio Is Not Supported By 2020 Revenue Projections”), and in one other, I in contrast AMD’s future over a five-year interval with Intel (NASDAQ:INTC) (Intel Vs. AMD: In A 5-Year Plan, Intel Wins In A Landslide). I do not assume the XLNX deal helps in both of those comparisons.

Listed below are 5 causes Xilinx could trigger AMD inventory some issues.

1. AMD is paying 74 instances XLNX earnings

I might argue the AMD’s supply is priced for perfection, i.e. to ensure that this to be optimistic for traders, the mix of AMD and XLNX should carry out on the highest ranges, higher than both has ever carried out previously.

Supply: Macrotrends

2. The FPGA market isn’t an enormous development space anyway.

Verified Market Analysis has developed an eight-year projection for the FPGA market and got here up with 8.6% between 2020 and 2027.

You possibly can’t pay 74x PE for an 8% grower not to mention for a 3.26% grower which is what XLNX’s income CAGR was from 2011 (income $2.369 billion) via 2020 (income $3.163 billion).

That is in comparison with AMD’s annual income CAGR for the final 10 years of 11%.

3. XLNX’s income seems lackluster too.

For those who take a look at XLNX’s quarterly income it really peaked in June of 2019 and has since then gone down. Cannot blame that on COVID-19 both for the reason that downdraft began final 12 months.

So does that income lower justify AMD paying 74X earnings?

Supply: Seeking Alpha

4. Neither firm generates sufficient free money stream to compete with rivals Intel or Nvidia.

For those who evaluate AMD’s free money stream with rivals Intel and Nvidia (NVDA) you possibly can see why AMD could also be struggling going ahead. They don’t generate sufficient FCF to be aggressive with these different two rivals going ahead.

Including XLNX to AMD doesn’t enhance the image a lot. Paying 43 instances FCF doesn’t appear a lot of a cut price both.

5. AMD’s rocket ship inventory value has a CAGR of 95% during the last 5 years

AMD is a tremendous story and it is maybe best to see this within the speedy rise of the inventory value during the last 5 years.

All I can say is “wow.”

The query is: What is going to turn into of that value CAGR going ahead for those who purchase an organization rising income at a 3% CAGR in a market (FPGA’s) rising at an 8% CAGR?

Appears to me that rocket ship has to fall again to earth within the not too distant future.

Conclusion:

I’ve been scratching my head attempting to determine why Lisa Su would engineer this very costly deal to start with.

This is are three attainable causes:

1. AMD feels they will need to have an FPGA product to compete with INTC and NVDA sooner or later and Xilinx is about the one choice on the market.

2. AMD’s inventory value could be very excessive proper now, so why not use that elevated foreign money to purchase an FPGA firm? If the worth drops over the subsequent 12 months or so (which I feel will occur) then this can prove to have been a cut price.

3. Lisa Su labored magic with AMD, possibly she will do the identical for XLNX. Personally, I do not actually assume that’s an apples to apples comparability however I might definitely be incorrect. Extra like apples to crab apples.

If I used to be an proprietor of XLNX I might promote my AMD inventory as quickly because the transaction is accomplished. In actual fact, I would promote it now simply in case the deal doesn’t go via for some purpose. I additionally see a restricted upside to his deal from an AMD value standpoint.

AMD is a promote when this deal is completed.

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Disclosure: I/now we have no positions in any shares talked about, and no plans to provoke any positions throughout the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.