Advanced Micro Devices (AMD +5.31%) is shopping again. Just a couple of months after putting the final wrap on its mega-merger with fellow chip designer Xilinx, AMD just announced it's acquiring data center solution specialist Pensando for $1.9 billion.
Data center upgrades are happening en masse right now, and it's a total land grab for the semiconductor industry. AMD's latest move gets it some new chips, as well as a play on enterprise-grade cloud software. Let's take a closer look at what the Pensando acquisition might mean for AMD and its investors.
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More data center business, please
AMD's stock price recently took a tumble after some analysts downgraded the company based on the mounting pressure the company is likely to see in 2023. AMD has a large consumer-facing business in the gaming and PC market, and after a couple of years of stellar performance -- stoked in part by the pandemic -- the chip designer could see a substantial slowdown in growth in its consumer segments next year.
These risks aren't unknown to AMD. That was (in part) the rationale behind the recently completed merger with Xilinx, which yields AMD new end-markets like aerospace and defense, automotive, and industrial equipment. Diversifying the business to gain exposure to larger secular growth trends is the rationale behind buying Pensando as well.
Pensando is a software-defined cloud and networking infrastructure company. For the modern enterprise, computing power is migrating to "the network edge" because of tech trends like 5G mobile and millions of network-connected devices. A data center in a centralized location just doesn't make a lot of sense anymore. The Pensando platform is based on a customizable processor and accompanying software stack for computing closer to the source of data creation and the end-user. Pensando helps its customers create an entirely new infrastructure, one that can be customized to their specific application needs.
AMD CEO Dr. Lisa Su explained the rationale for bringing Pensando into the AMD family:
To build a leading-edge data center with the best performance, security, flexibility and lowest total cost of ownership requires a wide range of compute engines. All major cloud and OEM customers have adopted [AMD] EPYC processors to power their data center offerings. Today, with our acquisition of Pensando, we add a leading distributed services platform to our high-performance CPU [central processing unit], GPU [graphics processing unit], FPGA [field programmable gate array], and adaptive SoC [system on a chip] portfolio.
Adding a fast-growing start-up to the mix
AMD has been building momentum in its cloud and data center business, and Pensando will certainly help this continue. Founded in 2017 by a team of ex-Cisco Systems engineers, Pensando CEO Prem Jain said the company has deployed over 100,000 of its compute platforms since the company started less than five years ago. Customers include Goldman Sachs, IBM Cloud, Microsoft Azure, and Oracle Cloud.
Interesting side point: Qualcomm (QCOM +2.18%) Ventures was one of the most recent investors in Pensando, so AMD's $1.9 billion purchase will benefit shareholders of the mobility chip leader too.
Pensando is still a small start-up, and AMD is no doubt paying a premium on the assumption the Pensando platform will continue to pick up speed among cloud and networking customers. But plugging Pensando into AMD's own distribution channels could do wonders. After all, in the fourth quarter of 2021 alone, AMD said its "Enterprise, Embedded, and Semi-Custom segment" grew 75% year over year and hauled in $2.2 billion in revenue (which was 46% of total revenue).
AMD certainly has the cash to fund this acquisition, too. At the end of 2021, the company had $3.6 billion in cash and short-term investments and only $313 million in debt. Subsequent to the end of the year, Xilinx was added to the fold, which had $3.7 billion in cash and short-term investments offset by $1.49 billion in debt.
Put simply, Pensando will add a new tool to AMD's fast-growing cloud and network computing segment. Softness in consumer electronics spending may or may not be right around the corner, but big businesses are in dire need of IT infrastructure updates. AMD most certainly has a place at the table in this department and has its sights set on accumulating more market share in the semiconductor industry.
