Semiconductors power everything – from your phone and headphones to storing files on the cloud and F-35 Joint Strike Fighters. This is why we have seeing companies like Intel Corp. (NASDAQ: INTC), Nvidia Corp. (NASDAQ: NVDA) and others make big acquisitions to be the top dogs in a $500 billion market. Just this year we have seen some huge deals.
- Nvidia announced a $40 billion acquisition of Arm Holdings two months ago. They are a chip designer with a stranglehold on mobile chips and if approved by regulators, will be the largest M&A deal in semiconductor history.
- Analog Devices Inc. (NASDAQ: ADI) paid over $20 billion to acquire Maxim Integrated Products Inc. (NASDAQ: MXIM) a developer of chips for the automotive, industrial, healthcare, mobile, and data center markets.
Tech has been on a tear this year and you know it. But when it comes to investing, it’s difficult to find the next big thing. Companies like Amazon.com Inc. (NASDAQ: AMZN), Zoom Video Communications Inc. (NASDAQ: ZM), and Teladoc Health Inc. (NYSE: TDOC) have all been media darlings, but I’m focusing on a completely different space.
The fact is consolidation is fueling growth in the semiconductor market and that is why we have seen as much M&A in the semiconductor market this year as we have had in the past three years combined. These deals are creating cross-sell opportunities and improving manufacturing as they scale up.
While these deals I just mentioned were the largest semiconductor deals of the year, I’m looking at what could be one of the biggest opportunities as two more companies join forces.
What this deal means for the Semiconductor Industry
Right now, I’m focused on the $35 billion acquisition of FPGA manufacturer Xilinx Inc. (NASDAQ: XLNX) by Advanced Micro Devices Inc. (NASDAQ: AMD). While they might not be a household name, they make chips for the automotive, wireless, industrial, and data center market and will help AMD to compete with the likes of Intel and Nvidia.
Xilinx specializes in Field Programmable Gate Arrays (FPGAs). While a typical semiconductor can’t be programmed after it is put to use, FPGAs have one key difference. A user can actually delete and replace the software and leave the hardware unchanged, a huge advantage over CPUs and GPUs.
This is why Intel Corp. (NASDAQ: INTC) bought Altera in 2016 for almost $17 billion. When it comes down to it, FPGA’s are one of the most versatile semiconductors out there and that is what makes the acquisition of Xilinx so exciting.
It’s no wonder then, that making the right call on a company like Intel can be highly lucrative. In fact, if you want to get in on the trading strategy that gave its readers an opportunity to score 42% gains in just two days with a spot-on read of Intel Corp. (NASDAQ: INTC), just click here.
But it’s not just Intel that’s pursuing FPGAs. There are FPGA use cases are everywhere. Microsoft Corp. (NASDAQ: MSFT) uses FPGAs in its data centers, Amazon offers them in their cloud services and even the military uses them for F-35 Joint Strike Fighters. These chips are also used for artificial intelligence and machine learning applications instead of GPUs.
One of its most important end markets and one AMD is very interested in given the competition with Intel and Nvidia is the data center. Last quarter Xilinx grew this business 30% year over year driven by cloud build-out. AMD acquiring Xilinx will help to expand its already rapidly growing data center business.
AMD has excellent management with Lisa Su at the helm. She came on as CEO of AMD in 2014 and brought the company back from the brink of bankruptcy to all-time highs. Her and Victor Peng, who actually spent some time at AMD before Joining Xilinx and serving as the CEO should make for a very strong team. That, along with the deal being instantly accretive to margins, cash flow, and EPS, will help the joint company hit the ground running.