Advanced Micro Devices (NASDAQ: AMD) Asks Xilinx (NASDAQ: XLNX) To Dance

In what was one of the bigger M&A stories in recent months, Advanced Micro Devices NASDAQ: AMD this week announced an all-stock purchase of their $30 billion competitor Xilinx NASDAQ: XLNX. The news came as AMD reported solid Q3 earnings on Tuesday that saw both revenue and EPS beat analyst expectations.

Wall Street was particularly happy with the 55% jump seen in revenue year on year as well as the raised forward guidance offered by management. This is the kind of impressive performance that makes a surprise eleven figure deal feasible. The Xilinx acquisition is expected to further boost AMD’s already well-tuned revenue engine, in particular, its expanding data center business. AMD’s margins, cash flow and bottom line EPS are all expected to see solid upside in coming quarters as a result.

Solid Momentum

As AMD CEO Lisa Su said with the release; “our business accelerated in the third quarter as strong demand for our PC, gaming and data center products drove record quarterly revenue. We reported our fourth straight quarter with greater than 25 percent year-over-year revenue growth, highlighting our significant customer momentum. We are well-positioned to continue delivering best-in-class growth as we further extend our leadership product portfolio with the launches of our next-generation Ryzen, Radeon, and EPYC processors".

While this is great fuel for the bulls, it may be a while yet before the upside from the Xilinx acquisition is reflected in AMD’s share price. Despite the solid numbers, AMD shares still fell 4% on the news while conversely, Xilinx’s jumped nearly 9%. They themselves were coming off a strong earnings report last week that was better than expected, although with revenue still contracting 7% on the year. At the time, analysts were quick to point to the company’s data center performance, up 23% quarter on quarter, as a key component of future growth and it’s clear they weren’t the only ones sizing it up.

The increased revenue from the merging of the two data center businesses is a serious feather in AMD’s cap, as noted by Susquehanna analyst Christopher Rolland. While it could be a full year before the deal closes, he sees AMD’s market share continuing to eat into Intel’s NASDAQ: INTC dwindling patch.

Intel had been one of AMD’s biggest competitors until this past summer’s implosion and subsequent 30% drop in share price. It’s certainly been an annus horribilis for the 52 year old tech company, who only last week saw their shares drop 7% after reporting weaker than expected earnings. In particular, the much feted data center group saw its revenue drop by more than 6% year on year, at a time when AMD’s is doing nothing but expanding. Intel shares have continued their slide since and finished Tuesday down a further 2% after the AMD / Xilinx news.

Getting Involved

Interestingly, this week’s deal mirrors Intel’s 2015 purchase of Xilinx’s rival at the time, Altera, and the irony is surely not lost on investors. Since that news broke almost five years ago, Intel shares are up a paltry 30% compared to AMD’s 3,000%. It’s clear where Wall Street has been putting its money and there’s no reason to think that this will change anytime soon.

For those of us still on the sidelines, any continued weakness in AMD’s shares should be considered a buying opportunity as AMD has been the jewel of many portfolios in recent years and look set to continue shining.