Andrei Berezovskii
Funding Thesis
With AMD’s (NASDAQ:AMD) PC market share positive factors in the previous few years stagnating and even declining, bulls are relying on the corporate’s different segments to drive progress, notably the profitable knowledge heart enterprise. It’s also on this section particularly the place Intel’s (INTC) erosion of management in favor of AMD has been most seen.
Nonetheless, the newest info signifies that AMD has downgraded its next-gen Turin specs, paving the best way for Intel reclaiming knowledge heart management sooner than anticipated, in flip erasing this important a part of the AMD funding thesis.
Turin Downgrade
In late 2021, within the following article, I conceded that I had been fallacious about AMD with regard to knowledge heart management, as rumors have been indicating that its Turin Zen 5 EPYC CPU can be stronger than I had thought-about: AMD Vs. Intel: I Was Unsuitable About AMD. This meant that even when Intel took management with Granite Rapids, this might solely final shortly.
Since then, this thesis has really been confirmed fairly not too long ago, because the next-gen Diamond Rapids was utterly absent from Intel’s 2025 knowledge heart roadmap, regardless of that the earliest rumors had indicated that Diamond Rapids was focused for 2024: Intel Xeon: One Step Ahead, Two Steps Backwards.
Nonetheless, in accordance with the newest rumors, Intel will seemingly not even want Diamond Rapids to compete, as Turin has obtained a major, thesis-changing downgrade.
As a substitute of 192 cores on N3 (many individuals on the time even commented that it could launch in 2023), Turin in its present kind will solely sport 128 cores on N4 (which is an N5 by-product course of with solely minor enhancements), scheduled for Q3 2024.
Granite Rapids Improve
It ought to be apparent that one can not simply put a CPU on an older course of and scrap 33% of the cores and anticipate to be simply as aggressive. Nonetheless, what’s even worse for AMD is that along side its Turin downgrade, Granite Rapids has really obtained a serious spec bump.
As Intel disclosed in 2022, Granite Rapids has been placed on a brand new platform, it was moved from the Intel 4 to the Intel 3 course of (which delivers +18% efficiency) and it has obtained a brand new core structure that delivers about 10% larger efficiency per clock. As such, with so many modifications it is a utterly completely different Granite Rapids, as solely the product’s codename has remained the identical principally.
Certainly, even the core rely appears to have been modified. The rumors are a bit conflicting, maybe because of the Granite Rapids spec modifications over time, with one rumor saying 136 cores, and one other rumor saying 132 cores. (Intel’s unique disclosure for Granite Rapids was 120 cores.) The 132 core rumor appears most credible, as that is achieved through the use of three tiles with 44 cores every. (The subsequent step would in all probability be 138 cores utilizing three 46-core tiles or 144 cores by means of three tiles with 48 cores.)
To make sure, admittedly the Granite Rapids competing in opposition to Turin was not the situation that Intel initially would have anticipated, as the unique Intel 4-based Granite Rapids was scheduled for the primary half of 2022, competing (favorably) in opposition to Genoa as an alternative.
Verdict
With doubtlessly a barely larger core rely, with most definitely a (barely) extra superior structure, with a extra superior course of expertise, and with each CPUs launching across the identical time (Q3’24), Granite Rapids ought to compete favorably in opposition to Turin, lastly retaking knowledge heart management after 5 years.
Whereas there’s seemingly a risk of AMD launching a N3-based Zen 5 line-up a yr later, by then Diamond Rapids ought to launch just some quarters in a while the 18A course of, permitting Intel to reclaim knowledge heart management as soon as once more. At that time, a six-month management (at greatest) won’t be significant since cloud and enterprise prospects purchase roadmaps and never simply single-point options.
Turin Dense vs. Sierra and Clearwater Forest
An analogous story is popping up for the E-core roadmaps of each firms. Right here, additionally, Turin has obtained a major spec downgrade, going from 256 cores to 196 cores.
Nonetheless, the saving grace for AMD right here is that Intel has really cancelled its excessive core rely Sierra Forest-AP line-up, which was anticipated to extend core rely to over 300 and even over 500, rendering AMD clearly uncompetitive.
As such, AMD ought to be capable to keep its efficiency management, and it stays to be seen how Intel will react with Clearwater Forest on 18A. If Intel goes all-in, then it ought to be capable to double the core rely of Sierra Forest-AP, leading to a 1024-core behemoth. Even when AMD does launch a 256-core Turin dense (on N3 in 2025) and Clearwater Forest solely tops out round 512 cores or so, there ought to be sufficient margin of error right here for Intel to take management. That’s the advantage of getting course of management.
Notice that moreover absolute core rely and efficiency management, although Sierra Forest-SP will “solely” have 144 cores, the rationale for the decrease core rely is just because this chip could have much less silicon, and therefore will likely be less expensive (in comparison with the beforehand rumored 512 core rely model). It is because the elemental expertise (the E-cores having a a lot smaller space and Intel 3 being extra superior than TSMC N4) is in Intel’s favor, in comparison with Turin dense.
Put in a different way, evaluating 192-core Turin dense in opposition to 144-core Sierra Forest is like evaluating a small laptop computer chip (Sierra Forest) to a full-blown desktop chip (Turin dense).
Dialogue/Disclaimer
Whereas it’s usually not suggested to base complete funding theses simply on rumors, it ought to be identified that the newest rumor is solely a affirmation of a broader perspective that I’ve been discussing for a number of years, which is that TSMC (TSM) is shedding its course of management.
I’ve readily lined the struggles TSMC has had with its newest 3nm (N3) course of since 2020. To recap, the earliest sign was in 2020 when TSMC indicated that it couldn’t adhere to a two-year cadence, with N3 scheduled for quantity manufacturing within the second (as an alternative of first) half of 2022. Later, TSMC administration would specify that it was focusing on the July-August timeframe, which is a couple of 3-month lag in comparison with a two-year cadence. Nonetheless, TSMC finally ended up with its manufacturing announcement across the final day of 2022, indicating that it was merely beginning manufacturing to fulfill its unique assertion. In actuality, it at present appears that the subsequent iPhone (with A17 chip) would be the first N3 product, which interprets right into a 3-year cadence from N5 (Apple A14) to N3 ( Apple A17).
Additionally in the meantime, TSMC finally disclosed that it had launched a more moderen variant of N3, referred to as N3E, which had some fairly important revisions, together with a smaller shrink (by 1.6x as an alternative of 1.7x) as a result of using much less layers of EUV patterning. This would be the variant that may see important adoption and is focused for manufacturing in H2’23. The rationale for creating this newer variant is precisely due to TSMC’s struggles with getting the unique N3 course of prepared with excessive yield.
What this implies for AMD is that given TSMC’s struggles, and given that top efficiency merchandise usually are typically moved to new nodes later (as a living proof, Zen 4 on N5 launched precisely two years after the primary N5 chip), this already posed important questions for both the schedule or the node selection for AMD’s Zen 5 line-up. This was ultimately confirmed by AMD’s roadmap, which indicated that it could use each N4 and N3 for Zen 5.
AMD
Clearly, with out the good thing about a brand new node, this limits the potential of growing the core rely (as Intel additionally expertise whereas it needed to keep on 14nm for years). It’s this level that issues and that is precisely what has been mirrored within the newest rumors. Due to this fact, the rumor mentioned above ought to quite be seen as ‘merely’ a affirmation of the thesis that AMD, being reliant on TSMC, will turn into much less aggressive as TSMC begins shedding its course of management within the 2024-2025 timeframe. That’s finally the crux of the story that’s popping up and enjoying out.
It’s not a lot concerning the rumor as it’s about TSMC shedding course of management to Intel, which for AMD is leading to a really comparable consequence as when a number of years in the past Intel began shedding its course of management to TSMC (and which is now slowly beginning to turn into seen as Intel transforms from laggard to chief within the subsequent 18 months).
Valuation
Trying on the share worth, AMD trades for about 35x ahead P/E, which is kind of costly. Nonetheless, two elements must be thought-about. First, the collapse in EPS in the previous few quarters because of the downturn. When the business recovers, and AMD’s EPS and income return to ranges seen earlier than the downturn, the valuation may drop to maybe round 20x P/E. That is nonetheless not low cost, however extra cheap, and makes me have a tendency in direction of a impartial score on the inventory, as there’s merely no clear upside.
The second issue, nonetheless, is that AMD ought to profit to some extent from a rising (particularly knowledge heart) TAM over time, which may ultimately result in larger income and EPS than earlier than the downturn. For instance, throughout Intel’s March knowledge heart webinar, it anticipated the TAM to develop from round $40B to one thing like $120B.
However, this potential upside must be balanced with the inherent threat as mentioned right here of AMD being reliant on a foundry that’s on the verge of shedding its management. As well as, Intel’s TAM estimates have traditionally been a bit on the optimistic aspect.
For Intel, the thesis is rather more easy. Even disregarding a few of its rising progress companies, as its fabs turn into aggressive once more the gross margin ought to get well (shut) to historic ranges, and with that the profitability, which earlier than the downturn supported a share worth of $45-60. After all, if some initiatives comparable to foundry turn into profitable, the upside might be even larger.
After all, if AMD’s share worth hadn’t recovered so strongly already, the identical argument might be made for its shares, however AMD is already valued at present as if it previous the downturn.
Investor Takeaway
Subsequent yr, Turin and Granite Rapids are set to launch across the identical time. My earlier evaluation in 2021 indicated that Granite Rapids wouldn’t be aggressive in opposition to Turin. Nonetheless, since then, Granite Rapids has obtained a major spec bump, whereas every thing now factors to an much more important spec discount for Turin.
The last word cause for these occasions will be tied very properly to my overarching Intel vs. TSMC/AMD thesis, which is that Intel is regaining course of management within the 2024-2025 timeframe, as TSMC has been scuffling with each N3 and N3. It’s precisely this story that we at the moment are beginning to see play out within the knowledge heart.
Notice that these merchandise are nonetheless within the Intel 4/3 and TSMC N5/N3 period, whereas Intel’s technique was to regain course of management with 5 nodes in 4 years, culminating with the 18A node in early 2025. So whereas I at present anticipate Granite Rapids to take management in opposition to Turin with a small margin, Intel’s 5 nodes in 4 years technique will turn into most pronounced as soon as it begins launching 18A merchandise like Clearwater Forest and Diamond Rapids, which can compete in opposition to AMD’s N3 portfolio. This could end in a way more important management place for Intel.
General, the primary indicators of the tide delivering Intel’s favor are beginning to seem, with Intel retaking course of management changing into seen in tangible merchandise. As soon as the tide turns, simply because it did for Intel half a decade in the past, this won’t simply change once more in a single day. This implies Intel is now within the driver’s seat to guide Moore’s Legislation (and not less than the PC and knowledge heart CPU segments) for the subsequent half a decade or extra.
Mixed with a extra favorable valuation, this makes Intel the superior funding.
