Advanced Micro Devices
’ $35 billion acquisition of Xilinx has upended the thesis around AMD stock, causing sellers to outnumber buyers in the last two trading sessions following the announcement.
AMD shares have retreated 6.6% since Monday, while Xilinx stock has advanced 5.5%.
Investors’ unease aside, the deal has some sell-side firms cheering for AMD stock, including Craig-Hullum, Jefferies and Barclays. Of the analysts that cover AMD (ticker: AMD), 21 rate the stock a Buy, 16 have a Hold, and three rate the name a Sell.
Both Barclays and Craig-Hallum increased their price targets for AMD stock in the wake of the deal.
In a note to clients Wednesday, Craig-Hallum analyst Christian Schwab wrote that he had increased his target price to $100 from $60, citing the strong third-quarter results that came in above consensus, and the better-than-expected guidance for the fourth quarter. The company’s server processor revenue almost doubled compared with the year earlier, and AMD is on track to begin shipping its next-generation server processors later this year.
The new generation of consoles set to launch in November from
(SNE) also benefited AMD’s semi-custom business, Schwab wrote. Typically the semi-custom segment drops in the fourth quarter, but this year it is likely to grow because of the new console launches and ramp-up in production and sales.
In terms of the
(XNLX) deal, Schwab wrote that it was complimentary to AMD’s business, improving the company’s ability to support data center customers, and adds exposure to sectors such as automotive, aerospace, defense, and industrials.
Through Xilinx’s field-programmable gate array (FPGA) chips—or semiconductors that can be reprogrammed after production, unlike most semiconductors—AMD could benefit from the tail end of the 5G upgrade cycle, too. That’s because with many emerging technologies, it’s too expensive to experiment with chips with instructions that are set in stone, and build emerging infrastructure such as 5G. With FPGAs, companies can optimize the necessary programming inexpensively, before committing to specific designs.
To Schwab, Xilinx’s businesses also tend to retain customers for longer, because its strong designs can lead to longer product cycles. Together, Xilinx and AMD will also operate at a significantly larger scale, which should improve margins and cash flow. Following the deal, the balance sheet will have $2.4 billion of debt, and cash of $4.9 billion, according to Schwab.
Jefferies analyst Mark Lipacis also liked the deal, and has a Buy rating on the stock with a $100 target price. Lipacis wrote in a client note Tuesday that his team predicts the deal will create a leading supplier of chips for edge-network base stations.
Lipacis speculated that—unlike in the data center market, where general-purpose chips win—edge networks require chips that are good at very specific things: low-latency, custom built, specific units. Those are all things AMD and Xilinx are good at making. Edge computing is a concept that refers to moving processing power and data storage closer to where it’s needed, thus improving performance on local machines.
Shares of AMD have gained 67% this year, as Xilinx stock has advanced 23%. The PHLX Semiconductor index rose 21% in 2020.
Write to Max A. Cherney at email@example.com