The new leader in data center processors?

Former underdog chip designer AMD just had an "epic" 2022. Led by its Epyc processors, the company's data center segment nearly doubled in size from $3.69 billion in revenue in 2021 to $6.04 billion in 2022. With new chips like the Instinct MI300 (an "accelerated computing" processor that combines a CPU and a GPU) coming out later in 2023 to address advanced computing and AI needs, the future looks bright for AMD's top moneymaking segment. Data center surpassed the client PC and laptop segment in both sales and operating profit earlier in the year, and the gaming segment in the fourth quarter.

As incredible a run as AMD has had in this department, there's still a massive opportunity for it to expand even further. At the moment, incumbent Intel is still the leader in data center processors -- at least in terms of size. CEO Pat Gelsinger alluded on the earnings call that cloud operators (which use data centers to run their applications and where most AI heavy lifting is done these days) still have 95%-plus Intel chips installed. In terms of dollars and cents, that meant $19.2 billion in data center and AI revenue for Intel in 2022.

Intel believes that its large installed base gives it lots of opportunity to earn more revenue in the coming years when data centers eventually need to replace older chips -- and I believe that's true. However, that also means Intel has the most to lose in this battle. To wit, Intel's data center segment declined 15% in 2022. AMD is clearly in the technological lead right now, so it is the better growth option. With advanced AI workloads a high priority, scrappy AMD could further "chip" away at Intel's large data center business in the coming years.

AMD stock has rallied some 50% off of its mid-October 2022 lows, so the path forward will be much more bumpy. Though data center chips are still expanding, the company is still struggling in its client segment as the industry burns off excess inventory of PCs and laptops. Nevertheless, the new AMD aimed more squarely at big enterprise computing is still highly profitable on a free-cash-flow basis, and its profit margin could be in store for a rally in the second half of 2023.

Shares trade for 28 times expected 2023 earnings per share. For a company with both revenue and profit growth potential ahead of it, I think it's a fair value for investors who want to own AMD -- the new leader in AI processors -- for the long haul. $Advanced Micro Devices(AMD.US)$ $Intel(INTC.US)$ $NVIDIA(NVDA.US)$ $Direxion Daily Semiconductor Bull 3x Shares ETF(SOXL.US)$