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: AMD, Qualcomm make software-focused acquisitions as growth in core chip businesses questioned

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Advanced Micro Devices Inc. and Qualcomm Inc. both announced acquisitions on Monday that will help diversify into greater software holdings as analysts question growth in the chip makers’ core businesses.

AMD
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+2.31%

plans to acquire data-center software platform company Pensando for about $1.9 billion “before working capital and other adjustments.” Pensando’s distributed-services platform is already in use at Goldman Sachs Group Inc.
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-0.17%
,
Hewlett Packard Enterprise Co.
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+0.28%
,
International Business Machines Corp.’s
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+0.04%

Cloud service, Microsoft Corp.’s
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+1.52%

Azure cloud service, and Oracle Corp.’s
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+2.57%

Cloud service, all of which praised the service in AMD’s announcement.

“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,” AMD Chief Executive Lisa Su said in a statement. “All major cloud and OEM customers have adopted 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, GPU, FPGA and adaptive SoC portfolio.”

AMD’s data-center chip business has been consistently growing at a much higher rate than rival Intel Corp.
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+2.15%

Back in February, AMD reported that sales from the unit that includes data-center chips soared 75% to clear $2 billion from the year-ago quarter.

“Everyone wants a piece of the data-center action,” Maribel Lopez, principal analyst at Lopez Research, told MarketWatch. “It’s a huge growth market for 2022 and beyond.”

AMD’s core market, personal computers, does not appear to be a growth market right now, as a pandemic boom eases. The company was downgraded by a Barclays analyst last week due to those concerns, which also led to downgrades for PC manufacturers HP Inc.
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+2.28%

and Dell Technologies Inc.
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+1.58%

SEE: Fears about end of pandemic PC boom lead to downgrades for AMD, HP and Dell

Qualcomm is focusing on the automotive market, where Nvidia Corp.
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+2.63%

is also making big investments, while doubts about the smartphone market persist. JP Morgan analysts removed Qualcomm as well as Apple Inc.
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+2.18%

from their top-picks list late last week on concerns about softening smartphone sales.

Qualcomm is adding to its auto business with Arriver, having closed its complicated deal with investment firm SSW Partners on Monday. Back in October, Qualcomm and SSW Partners agreed to acquire Stockholm-based Veoneer Inc.
VNE,
+1.66%

for $37 a share, or $4.5 billion, with Qualcomm receiving Arriver. That offer topping an already agreed-upon buyout bid of $31.25 from Magna International Inc.
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+0.44%

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Less than nine months prior to Qualcomm’s October announcement, Veoneer and Qualcomm had formed Arriver to address the need for scalable and upgradeable auto ecosystem software.

In an interview, Qualcomm Chief Financial Officer Akash Palkhiwala told MarketWatch he could not comment on how big a part Arriver was of that $4.5 billion, noting that the company would provide more financial details in its earnings call on April 27. Palkhiwala said that with Qualcomm getting Arriver in the deal, SSW will seek to divest the rest of Veoneer.

Arriver is expected to help Qualcomm develop a full automated-driving stack to sell to auto manufacturers, leveraging its experience in smartphones, Palkhiwala told MarketWatch.

“What’s happening is that the car is becoming like a smartphone on wheels,” Palkhiwala told MarketWatch. “They’re all getting connected to the cloud and they all require Edge processing, which is very much like phones. The phone is the most cloud-connected device there is today, and cars are effectively becoming that.”

“It creates the unique opportunity for us to take the technologies and the assets we have in phones and bring them to cars,” Palkhiwala said.

Qualcomm has recently announced collaborations for its Advanced Driver Assistance System, or ADAS, software on the Snapdragon Ride platform with General Motors Co.
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+0.46%
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BMW
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Ferrari
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+4.15%
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and Renault
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FOR MORE: Qualcomm decides the autonomous-driving party has finally begun

AMD said that Pensando, which would become part of the company’s Data Center Solutions Group, would be headed by current Pensando CEO Prem Jain. AMD expects the deal to close in the second quarter of 2022. The announcement of the Pensando deal comes after AMD closed its massive $49 billion acquisition of Xilinx on Valentine’s Day.

“The deal seems to make sense, bolstering AMD’s enterprise datacenter solution offerings as well as strengthening their smartNIC portfolio (Pensando’s Distributed Services Card offerings should complement Xilinx’s products here),” Bernstein analyst Stacy Rasgon wrote in a note. “And the $1.9B price tag seems easily manageable given the company’s $3.6B current cash balance and quarterly [free cash flow] run-rate that is quickly exceeding $1B+ (so we don’t think we see the relatively new buyback narrative being impacted by the deal).”

Rasgon has an outperform rating and a $150 price target on AMD’s stock.

Shares of AMD rose more than 2%, while Qualcomm shares advanced more than 4% in Monday trading.

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