Intel should be concerned about AMD’s alleged interest in Xilinx

Xilinx’s (NASDAQ: XLNX) Stock recently popped after Das Wall Street Journal asserts AMD (NASDAQ: AMD) considered acquiring the programmable chip maker for over $ 30 billion. Investors should be wary of buyout rumors, but AMD’s rivals should be Intel (NASDAQ: INTC) should be concerned about this potential deal.

Reflection of Intel’s purchase of Altera

Xilinx sells field programmable gate arrays (FPGAs) to a wide variety of industries. In contrast to conventional chips, FPGAs can be reprogrammed after their manufacture so that they can be adapted and optimized for countless tasks.

FPGAs are widely used in data centers to speed up sophisticated AI and analytics tasks. They also optimize communication over 5G networks, radar systems and military networks. Xilinx and Altera have been the world’s largest manufacturers of FPGAs since the mid-1990s.

Intel bought Altera for $ 16.7 billion in late 2015. The company is now the core of its Programmable Solutions Group (PSG). Intel’s PSG sales rose 5% year over year to $ 1.02 billion, or 3% of sales, in the first half of 2020. Intel often bundles Alteras FPGAs with its Xeon CPUs in data centers.

Xilinx controls approximately 60% of the FPGA market while Altera controls the remaining 40%. However, AMD only controls about 2% of the server market, while Intel’s Xeons dominate the remaining 98%. Therefore, AMD would probably like to bundle its new Epyc CPUs with the FPGAs from Xilinx in order to gain a foothold in the difficult market for data centers compared to Intel.

Noticeable while the iron is hot

The net worth of Intel and AMD has been very different over the past 12 months. Intel’s stock rose just 4% as it struggled with a 14-nanometer chip shortage, late shipments of 10-nanometer chips, and the delayed rollout of the upcoming 7-nanometer chips.

These problems all resulted from the inability of Intel’s in-house foundry to keep up Taiwan semiconductor manufacturing in the “process race” to produce smaller and more powerful chips. AMD, which does not own a foundry, is outsourcing the production of its top chips to Taiwan Semiconductor.

This critical difference enabled AMD to provide a constant supply of CPUs as Intel struggled with bottlenecks and overtook Intel in the process race in both PC and data center CPUs.

Intel continues to dominate the server market, but its overall share of the CPU market declined from 77.1% to 63.9% between Q4 2018 and 2020, according to PassMark Software. Over the same period, AMD’s share rose from 22.9% to 36.1%, due to the growth of its Ryzen CPUs in the notebook and desktop markets.

That growth, and the strength of the GPU business, has got AMD stock up nearly 190% over the past 12 months. AMD is likely looking to use its recent growth to catapult itself into the Intel data center market – and the acquisition of Xilinx could be a bold first step.

Many possible hurdles

It makes strategic sense for AMD to buy Xilinx, but the deal could pose numerous challenges. AMD had only $ 1.8 billion in cash and equivalents at the end of the second quarter. As a result, AMD will likely need to take on more debt or fund most of the business in inventory.

The rumored $ 30 billion price tag is also pretty high for a company that had sales of $ 3.2 billion and net income of $ 793 million last year. The deal could also be blocked by regulators who may not want two chip makers to dominate the CPU and FPGA market.

Even if the acquisition is approved, AMD and Xilinx could still battle Intel in the data center market for two reasons. First, Intel’s Xeon chips still enjoy a “best-in-breed” reputation as the fastest server CPUs in the world. Second, Intel’s PSG business also owns eASIC, a company that makes custom ASIC chips that complement FPGAs in many industries.

Intel is still the only company that can bundle x86 CPUs, FPGAs and ASIC chips together. AMD will only be able to offer x86 CPUs and FPGAs, which will force customers to buy custom ASIC chips from chip manufacturers such as Marvell. In short, AMD may need to develop ASIC chips or acquire an ASIC chip maker to actually compete against Intel in data centers.

But Intel should still be careful

AMD’s alleged interest in Xilinx is not yet an immediate threat to Intel. However, Intel should be closely following AMD’s moves so that its “data-centric” business, which generated more than half of its revenue last quarter, doesn’t face aggressive competition from Epyc CPUs and Xilinx FPGAs.