How a Changing Chip Environment Will Affect AMD Stock

Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) announced Friday that it will build a silicon chip manufacturing plant in Arizona. The development adds a new wrinkle to the competition between Advanced Micro Devices (NASDAQ: AMD) and Nvidia Corp. (NASDAQ: NVDA),

leaders in the graphics processing industry.

TSMC is the world’s largest contract manufacturer of silicon chips. The company is considered the gold standard among chip makers. It is vital to companies like AMD and Nvidia, which do not fabricate their own semiconductors.

TSMC plans to build a $12 billion advanced chip factory with support from the State of Arizona and the U.S. government. The company did not detail the contributions from either.

The plant will use “TSMC’s 5-nanometer technology for semiconductor wafer fabrication, have a 20,000 semiconductor wafer per month capacity, create over 1,600 high-tech professional jobs directly, and thousands of indirect jobs in the semiconductor ecosystem,” the company said.

Production Expected to Begin in 2024

Construction is expected to start in 2021 with production planned for 2024. Production of 20,000 chips a day is only a fraction of what TSMC produces in Taiwan. But the plant brings important electronics production to the United States.

“This project is of critical, strategic importance to a vibrant and competitive U.S. semiconductor ecosystem that enables leading U.S. companies to fabricate their cutting-edge semiconductor products within the United States and benefit from the proximity of a world-class semiconductor foundry and ecosystem,” said TSMC, which is based in Hsinchu, Taiwan.

Secretary of Commerce Wilbur Ross said in a statement, “TSMC’s plan to build a $12 billion semiconductor facility in Arizona is yet another indication that President Trump’s policy agenda has led to a renaissance in American manufacturing and made the United States the most attractive place in the world to invest.”

The increase in semiconductor capacity, even if it is only 20,000 per month, could affect the competitive landscape for the two top graphics card manufacturers, AMD and Nvidia, both based in Santa Clara, California.

Vying for Production Capacity

Availability is a point of competition for AMD and Nvidia as much as performance and price are. Both companies, rivals in graphics processors and gaming consoles, use TSMC to fabricate their chips. Last October, TSMC began producing Zen 3 chips for AMD based on its 7-nanometer plus (7nm+) Extreme Ultraviolet (EUV) lithography technology.

Nvidia had already booked TSMC’s 5nm EUV production capacity for 2021 while going to Samsung for its 7nm production.

According to one report, Nvidia was later “unable to secure enough 7nm capacity” from TSMC. So it leapfrogged its rival by moving to the newer technology for next year. That leaves AMD in the driver’s seat for this year, and probably the first part of next year. But the long-term outlook is still a question.

COVID-19 has taken its toll on the installation of new equipment to fabricate these processors. It has challenged companies like AMD and Nvidia to book enough capacity at TSMC. Samsung offers a better price, but that’s not a big factor because these high-performance chips command a premium price.

Competitors Working Together

In another note on competition in the computing and graphics segment, Nvidia president and chief executive Jensen Huang revealed Thursday that his company will use an AMD processor in its new line of DGX servers.

Speaking on a video hookup that substituted for the company’s annual developer’s conference, Huang said the DGX is intended for specialized artificial intelligence needs in the data center. It is mainly powered by Nvidia graphics processors. AMD will provide the processor for the central processing slot, which has normally gone to Intel Corp. (NASDAQ: INTC).

AMD’s stock price rose more than 4% Thursday to close at $54.51. Nvidia was also up, closing at $321.22. Both stocks have been outperforming the S&P 500.

When AMD reported first-quarter results in late April, the chipmaker came in slightly below profit estimates and slightly above estimates for revenue. On a year-over-year basis, AMD was spectacular. Operating income totaled $262 million, up from just $16 million in the first quarter of 2019. Sequentially, however, operating income fell from $360 million in the fourth quarter of last year.