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No. At least not yet.
Within hours of CNBC’s initial reporting, a GlobalFoundries spokesperson
clarified the rumor.
This article will discuss implications for Tesla, AMD, and Nvidia should the
CNBC report be true.
Background
On September 20, 2017, CNBC reported that Tesla (NASDAQ:TSLA) is working
with Advanced Micro Devices (NASDAQ:AMD) to develop its own artificial
intelligence chip for self-driving cars. As well, the report mentioned that
Tesla intends to build on top of AMD’s intellectual property. However,
within four hours of publication, a correction comment was added. The
correction stated that GlobalFoundries CEO Sanjay Kumar Jha mentioned Tesla
as an example of a company working with chip fabricators, but did not
specifically say that it was a customer of GlobalFoundries.
(Source: Tesla.com)
Executive Biography of Sanjay Jha
Sanjay Kumar Jha has a successful track record in the technology industry.
For example, prior to becoming GlobalFoundries CEO in January 2014, Mr. Jha
was the former chairman and chief executive officer of Motorola Mobility.
Prior to that, he spent 14 years and worked his way up to become the chief
operating officer of Qualcomm Inc (NASDAQ: QCOM). While at Qualcomm, his
strong electrical engineering background allowed him to advance the
semiconductor business by developing five generations of modem and cell site
chipsets. GlobalFoundries is now the third-largest wafer producer behind
only Samsung (OTC:OTC:SSNLF) and Taiwan Semiconductor Manufacturing Company
(NYSE: TSM).
Mum on Rumor
Although AMD declined to comment and Tesla said it would not comment on
rumors and speculation, both these companies did not outright deny the news.
This behavior should be assumed to be typical as the companies may intend
to release a public announcement regarding this partnership. In 2009, Jim
Cramer revealed a hedge fund strategy for manipulating Apple (NASDAQ:AAPL)
stock, noting that the company rarely confirms or denies any rumor. As a
result, many writers would speculate widely on Apple and publish pieces
without any confirmation at all. This is typical of large-cap companies.
The CNBC report said that Tesla and AMD spin-off GlobalFoundries CEO Sanjay
Jha are in partnership with each other for chip design. However, a
GlobalFoundries spokesperson said the CEO was misreported. GlobalFoundries "
does not comment on customers or potential customers. Sanjay simply cited
that tech companies like Apple, Google and Tesla are examples of the types
of businesses showing interest in working closely with silicon companies to
differentiate their offerings," the spokesperson said in a written statement.
Implications for Nividia
Nvidia (NASDAQ:NVDA) sells its Titan graphics card for around $1,200
directly through its website, and only limits two per customer. Nvidia is
supplying a Drive PX 2 platform rather than a single graphics card to Tesla
for their autonomous cars. Assume that Elon Musk negotiated with Jensen
Huang for a $1,000/ Drive PX 2 platform. As mentioned above, Tesla intends
to roll out 500,000 cars in 2018. This equates to a potential loss of
revenue of $500 million for the year 2018. Keep in mind that Tesla may
become more efficient in vehicle production, so loss of revenue may be even
higher.
(Picture of a Drive PX 2 platform; Source: Nividia’s website)
As you can see in below figure 1, Nivida’s fiscal year 2016 raked in $320
million for the auto market. This market has been growing quarter to quarter
, and is expected to be sustained due to many automakers transitioning to
smart technology for vehicles. Should Tesla in fact decide to depart from
Nivida for AMD, then this would significantly impact Nividia’s auto market.
Investors should note that the auto market made up roughly 5-10% of Nividia
’s revenue in any given quarter. However, since this space is growing,
investors should expect larger overall percentages in upcoming years. This
is likely to occur as more demand and resources are being invested in
artificial intelligence to be used in driving.
(Figure 1 – Nividia’s Quarter-to-Quarter revenue)
Implications for AMD
On September 20, 2017 AMD announced at the GlobalFoundries Technology
Conference that it “will be transitioning its Ryzen CPUs and Vega GPUs to
12nm LP technology next year.” The announcement came from the company’s
Chief Technology Officer Mark Papermaster, that 12LP volume production will
begin in the first quarter of next year. This is significant for AMD since
figure shows that 12LP has the capability for automotive applications, hence
the potential Tesla partnership. If AMD lures Tesla away from Nividia, then
AMD stands to be a leader in the auto market. Tesla will only continue to
grow its vehicle production, so market potential is significant (>$500
million post-2018). As well, other auto manufacturers are likely to be
paying attention and may consider savings when switching to using AMD's
intellectual property as opposed to paying well documented high margins from
Nvidia. Second generation Ryzen and Vega products are expected to be
available on the market soon thereafter.
(Source : Wccftech.com)
During the AMD Radeon Instinct tech briefing from the 2016 AMD Tech Summit,
Dr. Lisa Su, AMD president and CEO, talked about how AMD has plans for
autonomous vehicles (outlined in picture below). Investors should note that
AMD is not far beyond Nividia, and they are continually progressing in the
automobile space as well. Dr. Lisa Su shared "Our goal is for AMD to have
continued access to leading-edge foundry process technologies enabling us to
build multiple generations of great products for years to come." This
forward thinking by the CEO should comfort shareholders who are patient
enough to hold long term.
(Source: 2016 AMD Tech Summit)
Implications for Tesla
This partnership with AMD will likely to reduce demand from Nvidia GPUs.
Strategically, Elon Musk wants to reduce reliance on other companies to
maximize profits for the company. This makes logical sense and is consistent
with Elon’s character.
Elon’s goal is to reduce cost by any means necessary. One example of this
is Tesla’s Gigafactory – a facility designed to significantly reduce
battery cell costs. Since the battery cell production is in-house, Tesla is
able to manufacture batteries at the volumes required to meet production
goals (estimated 500,000 vehicles in 2018) and also to increase profit
margins. Elon’s desire to in-house makes absolute sense here with AMD chips.
Earlier this year, Elon Musk claimed that he believes Tesla’s plan for
level 5 fully autonomous driving is only two years away. He elaborated that
the vehicles can drive themselves without a driver as backup and will allow
drivers to sleep as well. This revolutionary thinking has propelled him to
command a better pricing for the artificial intelligent chips. Car owners of
Tesla 3 models would be the clear beneficiaries here with lower potential
costs.
Conclusion
The CNBC Report sparked AMD shares to jump over 10% in gains on September 20
, 2017. Investors should understand that the article has been rectified to
state that there was no solid evidence of partnership between Tesla and
GlobalFoundries. However, it is quite common for large companies to stay mum
on this type of news until they publicly announce them. Tesla wants to lead
in automobile industry with superb autonomous driving technology and
product. Since the company plans to grow to 500,000 vehicles in 2018, this
puts enormous pressure on Nividia and AMD to compete for better pricing.
There will be a loser and a winner here. Both Nividia and AMD are innovating
and want to dominate the automobile market. Lastly, this type of news may
eventually come to fruition once minor details of contracts are worked out.
These are exciting times in the tech world!
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