AMD Stock Is Soaring — Should It Buy Skyworks Solutions?
The semiconductor industry is consolidating rapidly. The rising share prices of the winners is creating more valuable currency they can use to acquire rivals whose products could add to the selection they make available to their customers.
A case in point is AMD which October 27 announced it would swap $35 billion in stock for the shares of Xilinx. Will Skyworks SWKS Solutions be AMD’s next target?
Someone should put Intel investors — who have seen their shares lose 25% of their value in 2020 — out of their misery and acquire it. Sadly, that someone won’t be AMD because Intel’s $187 billion market capitalization puts it out of reach for AMD — which sports a 50% smaller market cap.
With Skyworks’s $23.3 billion market capitalization and the growth potential it will realize as Apple AAPL rolls out its iPhone 5G, AMD — which admittedly has its hands full with Xilinx — could strike while the iron is hot.
(I have no financial interest in the securities mentioned in this post).
AMD’s $35 Billion Xilinx Buy
AMD joins Nvidia as one of the larger chip companies using their rising stock price to make acquisitions. As CNBC reported, about six weeks after Nvidia announced a $40 billion acquisition of Arm from Softbank, on October 27 AMD went public with its deal to pay $35 billion in stock to acquire Xilinx.
Both acquirers enjoyed a run-up in their stock prices. Since the beginning of 2020 and October 27, Nvidia shares are up 162% while AMD’s stock has risen 141%.
AMD’s acquisition of Xilinx is aimed at helping it boost revenue from selling chips into data centers — from 15% in 2019 to 30% of total sales by 2023. Xilinx makes programmable processors and powers networking and storage products.
AMD expects those chips to help it achieve that data center market share gain — winning customers from Intel among others. As CEO Lisa Su said on October 27, “Together, we will be a stronger strategic force powering the next generation datacenter,” CNBC reported.
Indeed AMD has steadily gained market share against Intel. As the Wall Street Journal reported, AMD controlled nearly “a fifth of the market for PC central processors in the second quarter [… and] has been gaining share in CPUs that go into servers.”
Intel Losing In the Data Center
Intel was already in a relatively weak position before this deal. After all, its shares have lost about a quarter of their value in 2020. It did not help that on October 22, Intel reported a 4% drop in sales to $18.3 billion for the third quarter of 2020, according to the Wall Street Journal.
Intel’s results were dinged in part due to a drop in demand from companies and governments that operate data centers. Demand fell 47% in this market segment — spurring a “7% drop in Intel’s data center revenue to $5.9 billion — falling short of what analysts surveyed by FactSet forecast,” noted the Journal.
It’s not all gloom for Intel investors. After all, Intel raised its 2020 guidance last week. It now envisions 5% revenue growth to $75.3 billion for the year and earnings per share of $4.55 — $300 million and two cents a share higher, respectively, than the company had previously guided, reported the Journal.
CEO Bob Swan said in a statement “We’re forecasting growth and another record year, even as we manage through massive demand shifts and economic uncertainty.”
AMD Could Further Expand Its 5G Footprint With Skyworks Buy
Should AMD aim for a bigger share of 5G chip market?
Apple’s iPhone 5G could enable wireless Internet connections that are 100 times faster than older phones, according to TheStreet.com.
Apple has been late to the 5G party because of disputes with Qualcomm — and Samsung and Huawei rolled out 5G phones in 2019. Skyworks “makes custom semiconductors for the radio frequency systems used by handset makers and wireless providers. Its amplifiers, switches and other components work with 5G radios to deliver better signals, routing and network capacity,” noted TheStreet.com.
While Skyworks — whose stock has increased a modest 15% so far in 2020 — won contracts from these two 5G leaders last year, it still depended on Apple for 51% of its 2019 sales. If demand for Apple’s 5G phones is robust, that would be good news for Skyworks.
Could AMD acquire Skyworks now to take advantage of that growth opportunity? Skyworks sports a $23.3 billion stock market capitalization. Were AMD to pay a 25% premium, it would need to fork over $29 billion.
I admit that this idea would be a stretch for AMD at the moment. However, given the likelihood that consolidation in the chip industry is likely to continue, I would not be surprised if one of the big chip companies that have enjoyed a pop in their stock prices this year makes a bid for Skyworks.