Chit Chat Stocks - Jose Najarro On What Interests Him About Advanced Micro Devices (Ticker: AMD)

Episode Date: August 18, 2022

AMD operates as a semiconductor company worldwide. The company focuses on two segments: Computing and Graphics. AMD was founded in 1969 in Sunnyvale, California. Listen as Brett and Ryan ask Jose questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128 Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Jose's work? Follow him on Twitter here: https://twitter.com/_JoseNajarro?s=20&t=Ce3KqX3F12lsSRsGlE_abw Contact us: [e-mail] Timestamps AMD | (3:37) Management | (19:33) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's episode is brought to you by our friends at Quarter. Quarter is an all-in-one investor relations app that provides frictionless access to conference calls, investor presentations, transcripts, and more, with Quarter investors can keep up to date with all their companies while on the move. I personally use it every earning season so that I can keep up with my portfolio companies while I'm on my commute to the office. They also just released a cool new feature that allows users to search across all transcripts. That means you can search and see how many companies mention terms like inflation or

cost pressure or recession or even metaverse, you name it. And the best part of all, the app's 100% free and it's on both iOS and Android. So go find it on your app store by searching quarter. That's Q-U-A-R-T-R, no E. That's quarter, Q-U-A-R-T-R. Welcome to Chit Chat Money. This is our Thursday deep dive interview. And today we have on the show, Jose Naharro. On these shows, we talk to one analyst and we try to cover a single stock in around 45 minutes to an hour, we ask the questions. It's typically a stock that they either own or follow really closely. And so today we're talking about advanced micro devices. I would say, even if you are not familiar with the semiconductor industry,

Jose is a great resource for getting acclimated to it. Did you mention, I don't know if you met Jose, what's his last name? Naharro. Naharro. Sorry. Yeah. Jose Naharro, he runs Jose Naharro Stocks. I think we've mentioned that during the interview as well, which is a YouTube page. Um, and it's, it's a great resource for anyone trying to get into or break into, I guess, the semiconductor industry and understand it. Did you have any highlights from the interview? Yeah. I knew immediately that it was a good

interview because afterwards I was like, all right, let's get him back on a couple of times a year on a good cadence here, because he does know his stuff. He is an engineer within that field um so or was an engineer in that field and knows it well i mean we talk about the cyclicality dynamics we talk about their competitive positioning between nvidia and intel and i think that was my favorite part probably like why they are kind of taking market share from intel and why that happened over the last five years yeah he seems to have seems to have a really good grasp on products like the actual products that they're issuing applicability to the different industry verticals. And I think you'll see that in the interview, but I don't think we need to

go any longer. Let's get to the interview. Here you go. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital. And Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chitchat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Okay, welcome in. Today, we are joined by, I guess, our colleague, friend, Jose Naharro. He's a Motley Fool contributor. He's also an engineer turned YouTuber. You can find his channel. It's

Jose Naharro Stocks. And he, I guess I should say, has an expertise in semiconductors, which is maybe an area where Brett and I don't follow too closely. But we're talking about AMD or advanced micro devices today. And let's start with, I guess, your background a little bit. How did you, I guess, why semiconductors for starters? What kind of inspired you to get into that space? I know we talked about it a little bit before the show. And then when did you first come across AMD as an investment? Yeah. So first, thank you guys for having me here. Super fun, super excited, especially talking about AMD. The way I got into AMD and semiconductor in general, I want to say it's mainly from education, right? So I did,

as I was kind of mentioning earlier on before we started, I did my bachelor's degree and master's degree in electrical engineering. And in bachelor's, you kind of get that general concept. if you learn a little about a lot. So I was just getting the basic steps. Then I started getting into, I decided to do my master's degree. And there I decided to focus a little bit more in a specific field. And I was working at an optical company there, and they deal a lot with semiconductors used for optical telecommunication. So I'm like, okay, let me just study this. So maybe I can progress a little bit more in my workplace. So I think, I think my first, class, I picked up a book and somehow they mentioned AMD in that book. And exactly when I

finished my first, my undergraduate and got my job, I didn't know anything about investing. So I started my investing career at that moment. So at that moment, I just wanted to learn more and more and more about investing. So then I read about this company called AMD. I don't even remember what it said, but it was both my engineering mind and my investing mind were like, Hey, let's learn a little bit more about this company. So I already kind of knew the basics of their technology. Now I want to learn a little bit more about their, um, I want to say a little bit more about their financials. And I want to say AMD was a tricky one. It was, uh, especially when you're first starting off, uh, you, the first thing I feel like investors learn were PE ratio

and everything that they set their standards to certain ratios and AMD at the time, I think it like 2015 2016 was in a horrible place this company had not released many new products they were very low in debt but because of what i was kind of studying i saw their kind of pipeline of what they were working with they just had new management and i'm like this company looks like it can do something pretty cool but at the same time my investing side is like but it doesn't look good in in forms of number and i think amd was the first time i saw like a growth company kind of throughout its process where it doesn't look at the beginning and then it kind of fruit it kind of becomes this powerhouse uh so so that's pretty much how i got into amd and like i said

it's it's definitely been one of the companies that i've learned a lot it was luckily one of my first multi-baggers unfortunately it was when i was just starting to invest so it's not one that i put too much money into uh and those are always the cases right it's like it's all about percentage returns it's all that matters um but it definitely was a huge learning curve um so yeah that's how pretty much i got into amd in general and then semiconductors after i was working at that telecommunication place i left after three years and i decided i moved into general dynamics more in the research and development side and there i was working with different projects and each project was in emerging technologies general dynamics is like a huge engineering contractor

usually for the government. And we would get pretty cool projects where it's like, hey, we've never seen this happen before. Can you guys work on it and see if it's something that is possible to do? And it was pretty cool seeing that process of where my engineering team would start with like three to five people at first, and then we would get some progress and then money started to come in. And it was like these three to five person teams would move into like 10, 15, 20 engineering teams. So it kind of showed me that, hey, my investing, what I like right now is looking in technologies that have some growth opportunity in the future that maybe might be super small at the moment, but just like that engineering team, you might start with three to

five solutions and then end up into a big, big team. So that's what pushed me a lot into the semiconductor market in general. All right. And it sounds like AMD is kind of in that regard, has that, I don't know, aspect to it because there's some of their segments that are just growing wildly quickly. And we're going to get into that. And just for reference, we kind of went into this quickly. AMD is a fabulous chip designer. So we should just say that up front, similar to NVIDIA and they outsource to the foundries like Taiwan Semiconductor. We'll talk about that relationship later. But first, just to outline what the company does, they recently broke up their revenue into four different segments. Let's go through each

of those? And what do you think is the most important for its success going forward? So yeah, I think the two main ones right now, or the oldest ones are the gaming and client, even though these are new segments, these are probably its oldest revenue source. So the gaming segment is pretty much the graphics cards that it sells. The biggest competitor here would be NVIDIA, but they have definitely released new products in that space. They also create chips for the PlayStation 5 for the new Xbox. I forget which one's the new Xbox, Xbox One. I forget the actual name, but they create chips for it. So they're at the gaming market. I think it's pretty cool. It's very consumer dependent. The second in the consumer market is the client market. Here's

they produce their processors their cpus their widely known processor right now is the ryzen they are in the ryzen 5000 series and in the upcoming quarters they will be releasing their 7 000 series i think sometime in september is expected release date here their biggest competitor is intel who both their competitors in the gpu and the cpu market control majority of the market share and i i can definitely we can later take a closer look at those market share numbers. I definitely found some online. So those are, I want to say, more consumer-oriented markets, which have pretty cool growth as kind of the consumer market growth. But the one I'm super excited about is the data center market. And this is the one probably

most people are excited about. This has huge growth opportunities. Data center market in general is not something that old. I want to say most companies just recently started separating their data sensor segment, I want to say in the past four years. Before this, this was kind of a very small market. Here, they create kind of CPUs, processors as well. Their mainly known one is the Epic. They're currently in their third generation. Here in the third generation, this is called Milan, I believe, and it has seen huge growth adoptions. Their Their fourth generation is going to be, let me just pull it up. I know I have it here.

All the names of the products are so hard to keep track. The 7,000 series. Yeah. So their fourth generation should be coming up later this year as well. And it's just been a huge growth adoption here where I was taking a closer look at that number for their most recent earnings. And their data center market grew 83% year over year this most recent quarter, being $1.5 billion out of that $6.6 billion. To me, that data center is super impressive

because in forms of market share, again, Intel is the biggest leader there. Tom's Hardware has a pretty cool picture. AMD right now has less than 15% of the data center market share, where Intel is still a huge, huge leader. I do believe that is pretty where a huge growth opportunity is. And then the following one is thanks to their silence acquisition, they kind of entered into the embedded market. This is a lot of like FPGAs, a lot of kind of semi-custom chips as well. And this is a market that I don't think many people discuss, but during most recent earnings call, Lisa Su, which is the CEO, mentioned that this is a market that is still very supply constrained and they still have huge demand

from it and huge growth opportunities from things like automotive aerospace and defense and so much more uh so definitely pretty cool solutions for me i'm super excited about that data center market on so i guess to go through them the so the gpu one these are primarily like i guess you mentioned the xbox as a customer but then it's also consumers can go can buy directly from them is that how it works so if you can go to like uh if you're building your own computer you can go to uh here in in the east coast we have a something called the micro center and it's just like a big candy store for pc uh do it yourselves you can go buy a graphics card because in in the pc market if you're if you're if you're gaming you need a graphics card to play some of these triple a games

uh also if you might be like a artist a 3d designer uh you need a high performance graphics card to render your video, to render your picture. And that kind of provides that strength there. In the engineering field, architectures, for example, they need those high-performance graphics computing cards to, again, render those blueprints that they're doing and so on. Okay. Makes sense. And you mentioned that they were not doing too hot, I think around 2013 to 2015 timeframe. But as of late, they've had a lot of success. And particularly over a lot of their peers, I think Intel is probably the biggest one that they've outperformed. What's changed? What's enabled them to have the success recently? I think it definitely has to do a lot

with management. Like you mentioned, Intel is a behemoth. Even though it's getting market shares from Intel, Intel still produces three times more revenue than AMD. So that's still a beast. In forms of market share, Intel is still a leader in the CPU market for the consumer. I'm pretty sure most laptops still have an Intel sticker opposed to an AMD sticker. If you go to Best Buy, they're still a big player there. But I do want to say AMD is grabbing market share fast and numerous reasons. I think when they changed CEOs in 2015, 2016, I believe that's when Lisa Su came in, they

decided to just focus on one thing alone, and that was pretty much make a good CPU for the low-end consumer market. I believe that was the secret sauce because Intel was a huge leader. They pretty much had a monopoly for a long time in the CPU market. So if you were building a computer, you were going to go out there and buy Intel's CPU. Unfortunately, they were a little bit pricier. So AMD was like, okay, we can't combat Intel right now in the best performance, but maybe we can combat them in the most performance to price points. So they started to focus very, very special on that.

And that's when they released the Ryzen series, the 1000 series. And inside of that, they also wanted to make a secret sauce within there. For example, if you're not a PC maker yourself, you probably wouldn't know this, but Intel, every generation, whenever you buy, or most generations, if you buy a new CPU, you have to buy a new motherboard. So a new CPU is like $200, $300. Then you buy a motherboard, it's like $200, $300. So just to start off, it's about $500, $600 on parts. AMD kind of mentioned, hey, we're starting with this kind of socket for the Ryzen 1000. And for the next generations, we're not going to have you shift motherboards.

You can use that same motherboard that you bought for this generation. And once we upgrade to new CPUs, you won't have to upgrade that. So everybody who was maybe, hey, just starting to build a PC at the moment, this might be the cheapest route. And I believe even right now, the Ryzen 5000, five generations later, you can still use that same motherboard you bought in the first generation. Until this final one that's coming out, the Ryzen 7000 that's coming out later this quarter, this one's going to be on a new generation of motherboard.

I guess such huge leaps have happened that they have to finally change sockets. So much technology has advanced that they're finally changing sockets, but they're going to continue that way where the next generation, there's going to be multiple generations of the same motherboard. I do believe this helped out a lot for them to kind of grab that consumer market. If anything else, I do want to say Intel, unfortunately, had no competition for a long time, and this made them very complacent. For each generation, I feel like Intel just made the right amount of performance leap

where it would give you a reason to maybe upgrade every two generations or so. But it doesn't seem like from just those leaps, you would think that the engineering team was just looking to make the enough. It wasn't to kind of innovate too much. And then AMDs, their whole thing was, hey, from generation one, generation two, that gap in performance had been insane. And then each generation had provided a huge gap in technology and performance improvements that now they are where the first generation was more seen as just an intro for just your

low-end consumer. Now their 5,000, their current generation, is seen as a true competitor to Intel's kind of high-tier products. So it's crazy how that has shifted. And I do believe it's because Intel felt pretty safe for a long time where they didn't have that competition. So I want to say it was a mixture of both AMD focusing on one thing alone and Intel kind of being complacent with where they were at. Interesting. One follow-up there. You mentioned the market share stuff.

Do you have any numbers? I think you mentioned that earlier about the exact ones. And is the thesis on AMD, if they're going to continue growing their revenue, that Intel will kind of be that continued market share donor over to them, say, over the next five, 10 years? Yeah, definitely. So first, we can take a closer look at numbers. I'm taking a closer look at Tom's Hardware. They have a great article and they got these data points from Mercury Research and definitely check it out. But it's kind of the market share of quarter two of 2022. So first they talk about the PC market. This is pretty much your desktops that you can go buy out there and like Best Buy or somewhere else, fully customized, fully built.

AMD right now only has 20.6% of the total market. About a year ago, it was 17.1%. And about two years ago, it was like in the low teens as well. I don't think they went that back. So we can see AMD definitely is grabbing that market share in the desktop. Now, if we take a closer look at the mobile and notebook, these are your laptops. AMD right now has 24.8% of the market share. Intel still has that other 70 something.

Um, and then in the server market, uh, AMD only has 13.9% where again, Intel still has a majority of that market in the market share. So I do believe where, like you mentioned right now is this is a market that's growing, especially in the data center side. Maybe the consumer side is not growing its market, but I do believe the data center market is growing the overall market share. so they have both the opportunity to grow market share in general, but take that market share from Intel at the same time.

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Podcasts, or if you listen on another platform, click the link in the show notes to go through the simple steps of signing up. If you're a regular listener to the show, we think the membership will provide tons of additional value. On top of the stock research episodes, members will get one Arch Capital Fund episode a month where we outline why we bought, sold, or continue to hold a stock in the Arch Capital Investment Fund, along with shows on our broader investment strategy. Sign up and become a Chit Chat Money Plus subscriber today. We can't wait for you to join our community. And you mentioned Lisa Su and management was a big part of their success over the last decade or so. What are your overall thoughts on the management team? I've

heard really good things about lisa sue um can you maybe talk to that like i guess just give us your overall thoughts so to me ryan i'm honestly not one to focus too much in management um the most i ever do about management is is try to maybe see some over there um education real quick i know lisa sue uh electrical engineer master's degree and then did some business as well um but i i get a lot of, it's weird. Now, when it comes to investing, I think this might be the weirdest thing, but I like to listen how they communicate with investors in the earnings call, how they respond to questions in the Q&A session, and how often they kind of inform investors in their investors' relations of what's going on. I feel from AMD, the overall management team does really

well at doing that. In the investors' relations, whenever they made an acquisition, they did a great presentation of, hey, what's working, where they're going to go from there. Lisa Su in the Q&A sessions really provides a lot of great insights. And it's weird. Like I said, this is an investment thing, but I just feel the way they communicate is the right way to communicate towards investors. And I really do enjoy that a lot. No, that makes sense. There are management teams that are, well, maybe not dishonest. They'll try to not talk about the bad things and not be honesty. And it sounds like AMD is pretty honest. Now, I want to talk about the relationship with Taiwan Semiconductor. I guess just generally, why invest in AMD over TSMC? Do you worry about

the power dynamics between the foundry and the chip designer? You know, who's going to get all of the profitability here? Yeah, definitely. I mean, it's definitely something I think about in forms of first just different markets in general i feel um in forms of growth opportunities they're in different spectrums i feel like amd their their growth spectrum is pretty wide unfortunately with high growth spectrum you also have a high risk side towards it where tsm i feel they do have growth opportunities like they can increase their capacity and for those not familiar with tsm this is the manufacturer of the semiconductor markets They manufacture chips for these companies that just designed their chips. Roughly, they have

about 50% of the market share. They're already huge, huge leaders here. Their only really true growth opportunity is increasing that capacity that they have. Unfortunately, that's pretty expensive. Another growth opportunity that they have is just the kind of innovation that they do in the manufacturing process. Manufacturing chips isn't as easy as just, hey, I can make a chip now. That's why in this space, there's only limited to, I think, TSM in forms of super leading technologies, TSM, Samsung, and maybe, maybe we can count Intel in that. But I want to say that growth opportunity there is very, they do have growth opportunity, but it's not as wide as AMD. So first, I believe it depends on

the investment style. If you want a little bit more growth, obviously a little bit more risk, AMD might give you that side right now. If you want to be in the semiconductor market, a little bit more general, TSM is definitely a better play. It definitely gives you a nice dividend, huge cashflow. I know they have a lot of long-term contracts, which give you visibility of how revenue might be coming within the next few years, the next few quarters, where AMD doesn't really have that. So it's more of where you want your investment side. Like Brett, you mentioned it, in the forms of design and manufacturer, I don't know. I mean, it's definitely a tricky one. I think it's just where you want to be in

the market. If you want to have that kind of growth opportunities, if you, like I said, with AMD, you have that risk of that competition coming in and taking back some of that market share, where in TSM, they are a huge leader. They're continuing to innovate. So I think that risk might be a little bit less if if tsm like disappeared tomorrow how difficult would it be for like could there be a replacement or is tsm specialized enough that like amd would just struggle for years that's a million dollar that's a trillion dollar question i would say it definitely would struggle but not just amd i mean i feel like a tsmc disappeared like this their biggest customer is apple like it's it's the whole market in general i think

would be in just a whole different state of mind um but let's say in amd's case tsmc uh produces right now five nanometer chips this is their leading chip that they are already shipping out the only other player that can do this right now is samsung within the creation of chips even even though they both create five nanometers, the actual process of creation, and there's something called chip stacking, which is how you put all these chips together, that's the bread and butter. TSMC is the one that at the moment does that chip stacking better compared to Samsung. And that's why TSMC has roughly 50-something percent of the market share, where Samsung only has, I believe, 17%, 18%. And Samsung is number two. So it's crazy how that number one

to number two place is in forms of market share. I feel like if TSMC disappeared, you definitely would see a lot of more customers go into that Samsung market, but there might be some performance lost just because TSMC at the moment definitely has that chip stacking a little bit better than Samsung. We've seen a few customers like Qualcomm recently kind of shift out of Samsung and moved into TSMC because they believe TSMC is kind of like the manufacturing process makes it a little bit more energy efficient uh in the long term of things so there's definitely someone out there uh the real question would be can samsung meet the capacity of of these new customers if they came in and i think the answer would be no right and intel's still a few years out at least

from their foundry ambitions uh let's so amd is pretty acquisitive you mentioned the i can never pronounce that name i think it's xilinx uh they make a lot of acquisitions what do these bring the table um are they important like for their strategy going forward is that something that maybe investors should price in and they're going to be continuing to buying companies maybe either for r d purposes or to enter a new segment and just thoughts on this capital allocation strategy in general yeah so the two acquisitions they've recently made have been silence and i i used to mispronounce this name all the time um i was always confused with it but silence is definitely the correct way. And Pensando. And this pretty much, if we can just take a step back into the

data center market, in this data center market, right now, before these acquisitions, AMD provided two solutions. The CPU, which I mentioned was that Epic processor, and they also produce graphics cards, which also go into data centers. But I forget the actual name that they use for their GPUs, but these were two solutions used in the data centers. These are probably the two main chips many people know about that go into data center, but there are so many other chips that go in there. For example, Xilinx has FPGAs. FPGAs also go into these data center solutions, and they're used for certain things. Accelerators that come in from Xilinx solutions also go into these data center markets. So what a lot of competitors have been doing recently is

they've kind of created so many chips that go into the data center. And because they have that hardware, they're able to create the software that makes the communication with these chips a lot faster. So if you buy, let's say, an AMD CPU, they have created some software efficiency where it might be better off to use an AMD GPU. It might be better off to now use a Xilinx accelerator car because they've kind of created this market, these software solutions. And a lot of things behind it

where the communication is now a lot easier. So it seems like AMD is just trying to grab all these different aspects where now they can, hey, you are a customer of our network cards, for example. If you buy our CPUs, we can obviously give you a better deal and we can give you graphs that show, hey, it's actually a millisecond faster if you use these in combinations. So it definitely makes sense why they're making these acquisitions,

because they're trying to grow that ecosystem and make that ecosystem stronger. In forms of capital allocations, I enjoy it, but I don't want them to go too far from here. I think these past two acquisitions have been enough. Now I think it's management time to sit back. Make sure everything works well together before thinking of something else. And through this, you've seen a nice amount of share dilution happening. A company has taken in some debt. They still have plenty of cash, nice positive cash flow from operations, but these are some things. So what I would want is, okay, I understand why they did all this. Now time to tone it back, maybe bring down some of that debt again, maybe bring down some of that share dilution again.

And then after that, maybe start that discussion again of moving forward into more acquisitions. Okay. One follow-up on the data center. I want to hit on this risk. We asked it in the NVIDIA episode as well. What are your thoughts on the in-house competition from the Graviton that AWS has come out? Is that just kind of a newsy item? Because I feel like I see that as someone that's not an expert in the space and think,

wow, that's a big threat. But from your view, what are your thoughts on that? So, I mean, we've seen a lot of big players make their own things. Like you mentioned, AWS has the Graviton. Google has created their own kind of tensor processor units as well. I forget the name of it. And big tech is definitely creating their own chips. Big tech, I feel right now, they have specified tasks. And most of the kind of products out there at the moment are very generalized. So the CPU, for example, is very good for general tasks, where it's good, it's needed, but Amazon might need a certain chip where it's just specialized

on a specific task. And that might only be worried for some for Amazon. Amazon might be the only one who needs it. So in the overall scheme, I don't think it's too much of a red flag at the moment, especially how we're seeing it. Most of these big players are just keeping that technology to themselves. It's not like they're giving it to their other players just because they want to keep that competitive advantage. Another thing that AMD and a lot of these semiconductor companies are doing is, for example, the first generation of their server processors or the data center solutions were meant for just general concepts. Every generation, they've actually made numerous iterations. For example, the first generation and the second generations were just meant for

general processing. The third generation, Milan, made a chip for general processing, and then they made one for a more technical aspect. They had two different solutions made with the same chip. Now, a clouding company can be like, yes, send me some of the generon because I have general customers, but I also have some customers using my data centers for more technical things, so let me get some of those things. Now, in their fourth generation, they're actually making four different with the same kind of architecture they're making four separate solutions they're making their general one they're making more tech technical one they're making more cloud native uh and i forget what the fourth one was but it just now as data centers continue to

grow the customers that they have also continue to grow and they might have specific tasks uh so they're going to be coming to like amds to kind of uh for example i don't think amazon will be able to create all those four solutions but they might have that secret sauce with graviton plus those solutions that amd gives them which now gives them a true competitive advantage okay we can't have a discussion on semiconductors without talking about uh cycles and i mean we just saw that nvidia report i think i think we always every time we've talked about semis result we've always kind of asked a question along these lines so i want to get your take um it seems that we've just kind of gone through the semi and maybe we're still in the midst of it uh semiconductor

shortage do you see any world where there's a glut following this or an oversupply um and or or do you think that for the time being there's enough demand that i guess it's the shortage might persist and it's going to constantly be in high demand i guess a follow-up if there were, if it were to reverse and there was sort of this oversupply, how would that impact AMD? Definitely. So cyclicality in the semiconductor market, historically, you only have data from the consumer market. And this has been always pretty heavy. Like historic, before 2010, I want to say data centers wasn't really a thing. So you didn't have that solution. You only had kind of like the computers that go into businesses, into the consumer market, electronics like that.

So back then, that was a very, I want to say, very heavy cyclical market because it was really dependent on one space. I do believe cyclicality, and again, I could be 100% wrong, but I do believe cyclicality now is a bit different, where now you're having so many kind of market opportunities that need semiconductors. You have the automotive market, you have the artificial intelligence, you have the data centers. And these are markets that I want to say just really started growing in the past five years. When we do have data that, hey, the consumer market is very cyclical, these other markets have not given us that data at the moment that we see how big of a downturn is happening. I know a lot of these companies give us some insight that, hey, we're seeing a

decrease in consumer, but we're still seeing huge growth in the data center market. We're still seeing huge growth in the automotive market. Unfortunately for many semiconductor companies, At the moment, the consumer market is still a big portion of that revenue. So where before I think the cyclicality was pretty big, I still believe we will have cycles, but these cycles would either be a lot shorter than before or just not as bad as before because they have some other kind of market that might be helping them push things up. I know, for example, there have been some global foundry companies, I believe it was Global Foundries themselves, that mentioned that, yes, they're seeing a decrease in consumer demand.

So they're not making too many chips for the consumer market, but they're still seeing a huge growth in these other markets where they're able to shift their manufacturing lines to those other chips and still be able to maintain a high utilization rate. So it's definitely a trick in one. And like you mentioned, it's the million dollar question to see, is data center going to end anytime soon? And if it does end, is it just going to be a quarter or two while these kind of data centers kind of look at their inventory really quick? And then after that, will they just repurchase again these new upcoming products? So I do believe cyclicality will continue. I just don't believe it would be to the extent we've seen before. All right. One follow-up again on that.

Do you think AMD is a little bit more insulated than NVIDIA because AMD may have more exposure So let's say the fifth gen gaming consoles, the Xbox and the PS5 compared to NVIDIA, which may have more exposure to the gaming PC market and the cryptocurrency market, which has really impacted them. Yeah. So I want to say this is where AMD shines a bit and it has this lucky, I don't know if it's a lucky break, but it's that it's not the market share leader in the CPU and it's not the market share leader in the GPU. So even though it might see a slowdown in the GPU market, and it did, it mentioned it is, it's not going to impact its total revenue dramatically because NVIDIA is the one with over, I believe, 80% in the GPU market, maybe even more. So NVIDIA is going to be the one that takes the huge hurdle. So I think right now for AMD, it is a blessing in disguise that it is the smallest market

because not only is it making huge innovation leaps, where it's able to take market share, and at the same time, if it loses the general market, it's not losing as much revenue as before as its top competitors, right? Intel, that's a big reason Intel is losing a lot because it is the market share leader in the CPU market. So when the consumer market takes a hit, that one's going to feel it really, really big. The other thing is with all these acquisitions, they've kind of really diversified a bit where in the consumer market, they're definitely having the consumer space. But in the consumer space, like you mentioned, Brett, they have the PlayStation 5, the Xbox, which has still been in low production. So they still have huge demand there.

In the data center market, they're still seeing huge growth there because maybe the customers that they have, they have some inventory control, but maybe they're doing more inventory control on the Intel side because that's the one that's been able to produce many more chips opposed to AMD. so they might still want the AMD side because they weren't able to produce as much as their competitors. So the overall change in different markets through acquisition, plus that blessing in disguise of that being not the leader, I think has helped it with the cyclicality. All right. That's beautiful. Yeah. Beautiful way to put it. Let's talk to wrap things up. We have two more questions. First of all, let's just talk financials. I mean, valuation.

what i mean how do you go about valuing amd i know it's tough for something that might have a little bit of cyclicality the cash flow might be a little bit lumpy how do you look at it so first i i try to look at it in forms of competitive it's where its competitors at right like i mentioned um intel makes three times more revenue than this company does yet amd has a bigger a bigger market share than Intel. So sometimes looking at that gets me, I sit back and wonder, hey, what's the market doing? Is it overvaluing AMD for its future growth? Is it undervaluing Intel at the moment for its kind of slowness in innovation? Or is it a little bit of both? Is it overvaluing, undervaluing Intel? So unfortunately, I don't know the answer to that. But if we take a closer

look at ratios. For AMD now, it is in a growth stage, but it is a profitable company. Forward PE ratio of 23. A forward PE ratio of 23, to me personally, doesn't scare me too much with the growth opportunities out there. That data center market is growing still at dramatic levels. Intel and AMD were actually expected to release their new generations for data centers at the same time, Intel actually has to delay theirs a bit more. So this is going to give AMD a little bit more time to grab that market share. That overall market share in the consumer market, they mentioned their embedded system is still very supply constrained. They still have huge growth. So they definitely have huge growth opportunities. The emerging technologies out

there, I think with a 23 forward PE ratio, it's not screaming buy, buy, buy, but it's definitely not telling me that hey this is a company that's overly valued at at the moment um so like i said for me i really like amd obviously i am a shareholder um but it looking at just that 4p ratio nothing to freak me out uh it could definitely look a little bit more attractive but uh it doesn't scare me at the moment yeah it's definitely a great performance recently so well i mean relative to the market you know over the past few years looks like it's um i mean come down a decent amount relative to i guess highs or last year's levels is that just worries over cyclicality or what's kind of the cause i know that's i know there's probably a few reasons but

like is that just investors worries yeah go ahead like you mentioned right i think it's mainly cyclicality issues um everybody believes that hey the consumer market is going to take that big hit, right? And that's going to hit, it's going to just go proceed through everything else from data centers. So I do believe the market is a little bit worried of that. And I do believe that kind of provides, if my thesis is right, where the cyclicality might happen, but might not be as strong. I do believe that's where the huge opportunity comes for the semiconductor market right now, where we might get a quarter or two where things look bad. And I feel like we might get a quarter or two. I don't know if it's happened already or if it's going to happen.

We're going to get a quarter or two where things are going to look bad. And every, I want to say most investors are going to be like, see, cyclicality is still a thing in the semiconductor market. And again, I don't know if it's happened already or if it's still, or people are expecting it to happen, but when it does or it did happen, we're going to see huge price drops. And then after that, we're going to get those two quarters where like, yeah, cyclicality was just that one or two quarters ago, we're still seeing that huge strength in here. Customers are back to ordering things again. And then you're going to see, I believe, these semiconductors provide really, really big winners in the long term of things. All right. Last question. We try to do a

pre-mortem. So why would something make a bad investment? What would have to happen for AMD to be a poor performer from here? I want to say, even though it is beating Intel in, or it's kind of an equal beating. It depends on who you ask. Intel is still a behemoth. It still has plenty of cash flow from operations. It's still a leader in this space. Their current generation, their 12th generation of CPU that they just released was one of their biggest generation leaps. It seems like they finally understood that, hey, it's not someone to just play dead with. So their current generation did see a nice performance leap and a lot of kind of consumer enthusiast in the tech market, we're really happy with the results.

So, I mean, they have a big wallet. Their upcoming generations can get a lot better. So there's that competition there. So if Intel can regain their market share, definitely something to kind of keep in mind of. At the same time, Intel has their own problems to deal with. I feel like they're trying to focus in too much, but it's definitely not something I would shy away from looking.

The second is if my thesis is wrong, where the consumer market and the data center market are not in, like there's no, if the cyclicality is still as it normally is, it can definitely impact, especially if I do believe a lot of investors are expecting data centers to continue to grow. If that's not the case, I do believe that might provide underperformance for AMD. The final thing is just overall chip imperfection. Um, there have been times where, Hey, you, you release a chip, uh, and they become, there might be some imperfection in the manufacturing side or in something, uh, that make these

vulnerable for certain attacks. Um, and something like that, um, can definitely happen and it can kind of, Hey, we're not, it brings this negative sentiment towards AMD and might push them to, uh, competitors as well. Um, in the far future, I do want to say there is a lot of transformation right now. Most CPUs are used in the x86 architecture. There is a new ARM architecture that's being thought about a lot. I know ARK Investment, they usually release their big ideas. They believe that in the next few years, ARM-based products are going to increase dramatically.

AMD is definitely playing in that space, but if it's expected to grow at super levels, you don't want to stay in one technology. You want to continue to innovate. So if they don't innovate in new technology that the market might be trying to see or trying to grasp in, I do believe would be another negative reason why AMD might lose in the long term of things. Right. There's always the innovation risk with these type of companies. All right. Well, I think that's all the questions we have for listeners that enjoyed this and want to follow along with you either on Twitter or YouTube. What's the Twitter handle or where else can listeners keep up with you? Yeah. So I mainly do video content on YouTube. You can find me, Jose Naharro Stocks, and there I'll most likely just be talking about semiconductors. I do write a little bit on

Twitter. You can find me, Jose Naharro Stocks, and I do write a nice amount of articles out the floor. You also find me, Jose Naharro there. So my name, and you can find me in all the platforms that I usually write in. Perfect. All right. Well, that is going to do it. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Jose, for coming on, and we'll see you guys next time.