Could the Silo AI acquisition change AMD’s fate, or is it a risky venture?

Advanced Micro Devices AMD is expanding its AI ecosystem by announcing the acquisition of Silo AI for approximately $665 million in cash. The transaction, expected to close in the second half of this year, will strengthen AMD’s AI capabilities and software expertise.

AMD has been on an acquisition spree to bolster its AI ecosystem, spending $125 million on a dozen acquisitions over the past 12 months. Nod.ai and Mipsology are other notable acquisitions in the recent past.

Headquartered in Helsinki, Finland, Silo AI offers comprehensive AI solutions and boasts a diverse clientele that includes companies such as Allianz, Philips, Rolls-Royce, and Unilever. Silo AI has developed large open-source language models such as Poro and Viking on AMD platforms in addition to its SiloGen modeling platform.

AMD’s acquisitions are primarily aimed at reducing the technology gap Nvidia NVDA in the ongoing race for AI supremacy. The Silo AI team is comprised of scientists and engineers with extensive experience developing custom AI models, platforms and solutions for leading enterprises spanning the cloud, embedded and endpoint markets.

However, the acquisition of Silo AI may not be enough to solve AMD’s growing pains, which include fierce competition from NVIDIA for dominance in the AI chipset market and continued weakness in the embedded and gaming segments.

Strong portfolio does not improve AMD’s prospects

Both AMD and NVDA have been investor darlings, fueled by the massive proliferation of AI that has created strong demand for the GPUs required to power AI models. The AI space is expected to remain strong thanks to increased spending by cloud computing providers such as Microsoft MSFT and Alphabet GOOGLE PL

Gartner estimates that AI software spending will grow at a compound annual growth rate (CAGR) of 19.1% from 2022 to 2027, to reach $297 billion in 2027. Spending on generative artificial intelligence (GenAI) software is expected to grow from 8% in 2023 to 35% in 2027. Deloitte predicts that enterprise spending on GenAI will increase 30% in 2024 from $16 billion in 2023.

AMD’s initiatives to expand its offerings position the company well to challenge NVDA not only in the data center market, but also in the emerging AI-enabled personal computer market.

New offerings like the Instinct MI325X accelerator help expand AMD’s reach into the data center market. AMD introduced the Ryzen AI 300 Series, AMD’s third-generation mobile AI processors, and the Ryzen 9000 Series for laptops and desktops.

However, the challenging macroeconomic environment and growing uncertainty surrounding the upcoming presidential election do not bode well for AMD, given its much smaller size and GPU market share compared to NVIDIA.

NVIDIA’s strategy of releasing new AI chip models annually instead of the previous two-year update schedule is increasing competition for AMD. Furthermore, initiatives by tech giants like Microsoft, Alphabet, and Meta Platforms to build their own AI platforms do not bode well for AMD.

Slow embedded and gaming solutions hurt AMD’s prospects

In Q2 2024, Embedded and Gaming segment revenues are expected to decline by significant double-digit percentages year-over-year. Conversely, Embedded segment revenues are expected to remain flat, while Gaming segment revenues are expected to decline by significant double-digit percentages.

The Zacks Consensus Estimate for Embedded’s second-quarter revenues now stands at $847.4 million, which would represent a year-over-year decline of 45.7%. The consensus estimate for Gaming is $661.94 million, representing a massive decline of 165.4%.

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AMD expects second-quarter 2024 revenue to be $5.7 billion (+/- $300 million). At the midpoint of the revenue range, this represents year-over-year growth of about 6% and sequential growth of about 4%.

The Zacks Consensus Estimate for second-quarter 2024 revenues is $5.71 billion, implying year-over-year growth of 6.54%. The consensus estimate for earnings is 66 cents per share, unchanged over the past 30 days and suggesting year-over-year growth of 13.79%.

Revision Estimate: Fixed

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AMD shares have gained more than 14% over the past month, outperforming the Zacks Electronics-Semiconductors industry’s 12.4% gain and the broader Zacks Computer & Technology sector’s 4.7% return. NVIDIA has gained 7.7% over the same period.

Performance in one month

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However, we believe the stock’s recent momentum will be short-lived given the growing fundamental challenges. AMD has a Growth Style Score of D, making the stock unattractive for growth investors. A Value Style Score of F indicates a stretched valuation at the moment.

AMD currently has a Zacks Rank #5 (Strong Sell), which indicates that investors should stay away from the company in the near term.

You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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