AMD and Qualcomm make software-focused acquisitions as growth in core chip businesses comes into question

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Advanced Micro Devices Inc. and Qualcomm Inc. both announced acquisitions on Monday that will help diversify into larger software portfolios as analysts question the growth of the chipmakers’ core businesses.

AMDA®,
+3.24%
plans to acquire data center software platform company Pensando for about $1.9 billion “before working capital and other adjustments.” Pensando’s distributed services platform is already used by Goldman Sachs Group Inc. GS,
+1.84%,
Hewlett Packard Enterprise Co. HPE,
+2.55%,
IBM of International Business Machines Corp.,
+2.36%
Cloud Service, MSFT from Microsoft Corp.,
+1.70%
Oracle Corp. Azure and ORCL cloud service,
+1.71%
Service Cloud, all of whom praised the service in AMD‘s announcement.

“Building a cutting-edge data center with the best performance, security, flexibility, and lowest total cost of ownership requires a wide range of compute engines,” said Lisa Su, AMD’s chief executive. , in a press release. “All major cloud and OEM customers have adopted Epyc processors to power their data center offerings. Today, with our acquisition of Pensando, we are adding a leading distributed services platform to our CPU portfolio, High performance adaptive GPUs, FPGAs and SoCs.

AMD’s data center chip business has consistently grown at a much faster rate than competitor Intel Corp. INTC,
+2.77%
In February, AMD announced that sales of the unit comprising data center chips soared 75% to $2 billion from the year-ago quarter.

“Everyone wants a piece of the data center stock,” Maribel Lopez, principal analyst at Lopez Research, told MarketWatch. “It’s a huge growth market for 2022 and beyond.”

AMD’s core market, personal computers, doesn’t appear to be a growth market at the moment as the pandemic boom wanes. The company was downgraded by a Barclays analyst last week over the concerns, which also led to downgrades for PC makers HP Inc. HPQ,
+0.68%
and Dell Technologies Inc. DELL,
+1.87%

SEE: Fears over end of pandemic PC boom lead to downgrades for AMD, HP and Dell

Qualcomm is focused on the automotive market, where Nvidia Corp. NVDA,
+1.91%
is also making big investments, while doubts about the smartphone market persist. JP Morgan analysts removed Qualcomm as well as Apple Inc. AAPL,
+1.41%
from their pick list at the end of last week on concerns over easing smartphone sales.

Qualcomm is bolstering its automotive business with Arriver, after closing its complicated deal with investment firm SSW Partners on Monday. Last October, Qualcomm and SSW Partners agreed to acquire Stockholm-based Veoneer Inc. OS: VNE
for $37 per share, or $4.5 billion, with Qualcomm receiving Arrive. This offer exceeded a previously agreed $31.25 buyout offer from Magna International Inc. MGA,
+3.79%

MG,
+3.78%
Less than nine months before Qualcomm’s October announcement, Veoneer and Qualcomm had formed Arriver to address the need for scalable, scalable automotive ecosystem software.

In an interview, Qualcomm CFO Akash Palkhiwala told MarketWatch that he couldn’t comment on how big Arriver’s share of that $4.5 billion is, noting that the company would provide more details. financiers during its earnings call on April 27. Palkhiwala said that with Qualcomm securing Arrive in the deal, SSW will seek to divest itself of the rest of Veoneer.

Arriving should help Qualcomm develop a full automated driving stack to sell to automakers, leveraging its experience in smartphones, Palkhiwala told MarketWatch.

“What happens is the car becomes like a smartphone on wheels,” Palkhiwala told MarketWatch. “They all connect to the cloud and they all require edge processing, which is a lot like phones. The phone is the most cloud-connected device there is today, and cars are indeed becoming one. »

“This creates a unique opportunity for us to take the technologies and assets that we have in phones and bring them to cars,” Palkhiwala said.

Qualcomm recently announced collaborations for its Advanced Driver Assistance System, or ADAS, software on the Snapdragon Ride platform with General Motors Co. GM,
+3.57%,
BMWBMW,
+1.67%,
Ferrari RACE,
+1.75%,
and Renault RNO,
+2.42%.

READ MORE: Qualcomm decides the self-driving party has finally begun

AMD said Pensando, which will be part of the company’s Data Center Solutions Group, will be led by current Pensando CEO Prem Jain. AMD expects the deal to close in the second quarter of 2022. The announcement of the Pensando deal comes after AMD completed its massive $49 billion acquisition of Xilinx on Valentine’s Day .

“The deal appears to make sense, bolstering AMD’s enterprise data center solutions offerings as well as their smartNIC portfolio (Pensando’s distributed service card offerings should complement Xilinx’s products here),” wrote Bernstein analyst Stacy Rasgon in a note. “And the $1.9 billion price tag seems easily manageable given the company’s current $3.6 billion cash balance and quarterly results. [free cash flow] a run rate that quickly tops $1B+ (so we don’t think the relatively new takeover narrative is impacted by the deal).

Rasgon has an Outperform rating and $150 price target on AMD stock.

AMD shares rose more than 2%, while Qualcomm shares rose more than 4% in Monday trading.

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