Advanced micro-systems (NASDAQ: AMD) announcement that he closed the acquisition of Pensando. The press release as well as much of the tech and trade press characterized this transaction as AMD strengthening its DPU offerings. As noted later in this article, this is not entirely accurate. DPU has been a popular term lately – Intel (INTC), Wonder (LMRV) and Nvidia (NVDA) have shown considerable interest in the DPU space. Nvidia, since acquiring Mellanox, has announced how it will restructure the data center with its DPUs. While AMD hasn’t had a presence on the network side of the data center in the past, the company made its first footprints in the DPU space through its acquisition of Xilinx. Market expectations were that AMD will work with Xilinx IP to expand into the DPU space.
Given this recent focus on DPUs, it’s easy to see why the market views the Pensando acquisition as a DPU play. However, this acquisition goes much further. Pensando, founded by ex-Cisco Systems (CSCO) executives with stellar track records, is a systems company rumored to take on Cisco’s business and is a non-obvious acquisition target for AMD. A chip vendor buying a system vendor is vertical integration.
In general, Beyond the hype is wary of acquisitions up or down the supply chain, as vertical integration is usually detrimental to long-term business goals. However, there are exceptions to this line of thinking. Vertical integration can be successful when an industry is about to go through major technological transitions. Such a transition now appears to be in play. AMD PR on acquisition had an interesting comment from John Chambers, an early investor and chairman of Pensando:
Pensando is built on strong customer relationships and a solution that is at least two years ahead in cloud, edge, and enterprise. For example, the performance and scale of Pensando’s distributed services platform is 8x to 13x that of the largest cloud provider and consumes less power. Pensando’s intelligent switching architecture has 100x the scale, 10x the performance at one-third the cost of ownership of any comparable product in the enterprise market. Pensando’s leadership position in software-defined cloud, compute, networking, security and storage services as part of the much larger AMD portfolio is, in my view, perfectly suited to shape the IT landscape. data centers for the next decade.
The competition Chambers is referring to is Amazon’s Nitro (AMZN). The Nitro solution is only available to AWS customers and has shaped much of the discussion about DPUs in cloud infrastructure. Pensando democratizes the solution by offering it widely to other cloud customers. Not every CSP will have the scale, resources, or inclination to build their own Nitro alternative. For these FSCs and their customers, Pensando becomes a top choice. This solution is not cloud specific as Pensando has extended this solution to enterprise and edge markets.
Where is the technological transition here? Why is now a good time for a company like AMD to buy Pensando?
At the heart of it, Pensando has built a network card with a custom processing chip that can be added to any server. The key IP here is that capable hardware comes with a versatile and flexible software stack. This class of device, which operates in the data center, at the edge, or at the customer site, replaces many different network-related functions, including firewalls, VPNs, and load balancers. It can also serve as a front end to network-based storage equipment. Indeed, it will allow AMD to meet various networking needs in the enterprise and in the cloud to replace many networking functions of traditional network equipment vendors. This is a technological breakthrough that can decimate much of today’s networking industry. By buying Pensando, AMD is effectively attacking core business areas of Cisco and other network vendors – tens of billions of dollars in TAM opportunities.
Why is it acceptable for AMD to enter such a systems business? Because Pensando is planning to replace network equipment with a server card, and server cards are the responsibility of any vendor that already sells server hardware, including CPUs and GPUs. AMD can sell these solutions directly to high-volume CSPs, bypassing traditional network customers altogether. For the enterprise space, AMD is likely to partner with the likes of HP Enterprise (HPE), Dell (DELL) and Lenovo (OTCPK:LNVGF) (OTCPK:LNVGY) – partners who are happy to start in the networking sector and push servers with AMD processors, GPUs, FPGAs and network processors.
In other words, Pensando seems like a great fit for AMD due to the technology transition that is about to happen in the networking space. Once the fit is established, the next big question is valuation. AMD is paying $1.9 billion, a hefty sum for a 4-year-old company. With an estimated annual revenue rate of around $100 million, you could argue that AMD is paying too much. However, Pensando is not a small company and its customer base is impressive. The company has so far raised $313 million, has around 500 employees, delivered various solutions and already boasts major design wins. We can see from PR so far that major customers endorsing the company include: Microsoft (MSFT) Azure, IBM (IBM) Cloud, Oracle (ORCL) Cloud, Equinox, HP, Dell, NetApp ( NTAP) and Goldman Sachs (GS).
Prem Jain, co-founder and CEO of Pensando, says the company has already shipped over 100,000 rigs to its customers. That’s an impressive customer base for this class of solutions. The strong enterprise and cloud traction also suggests that revenue is set to rise sharply over the coming quarters and years. High double-digit and even triple-digit growth rates seem possible.
While Marvell, Nvidia, and Intel all currently offer Smart NIC and DPU solutions to the CSP space, it seems there are no peers for Pensando. In other words, Nvidia and Intel have no one to acquire to recreate similar customer traction, especially on the enterprise side. The deal also appears to put AMD ahead of Intel and Nvidia in terms of this class of networking solutions, especially in the Enterprise segment. Neither Pensando nor AMD have shared Pensando’s roadmap, and it’s unclear how these companies’ next-gen technologies will compare. However, given the pedigree of the founders, what they have accomplished, and current customer appeal, the company is unlikely to have a weak track record.
Going forward, Pensando will significantly diversify AMD’s networking and DPU offerings. Could AMD have done the same with Xilinx? The answer is a resounding “no”. One thing to keep in mind with Xilinx products is that while FPGAs can deliver high performance, they require knowledge of the FPGA to program the necessary functions. This kind of expertise is not something low-volume customers have, which limits Xilinx usage to a few high-volume cloud and edge customers. The size of the FPGA also limits the possible number of functions that can be programmed. Comparatively, Pensando’s ARM-based products are much easier to program for cloud and enterprise customers and allow for a much wider range of solutions. With AMD’s CPU and GPU sales and service ecosystem, Pensando should be able to further accelerate its deployments.
Given the factors discussed above, while $1.9 billion may seem expensive today, the deal may be worth it if the combined companies deliver on their promise of growth. Integrating Pensando into AMD should also be straightforward, as there are unlikely to be many in-fighting or turf issues. We can be fairly certain that AMD will integrate Pensando into AMD’s operations and financials before the next analyst day.
Financially, the operation should weigh slightly on the results of the second quarter due to the integration costs and the relatively modest current income. However, given the likely strong growth, Pensando should be a solid revenue contributor later this year and in subsequent years.
All things considered, Pensando is a solid acquisition for AMD because it opens up a much wider TAM and allows AMD to be at the forefront of new data center and enterprise network architectures. AMD is touting itself as an increasingly formidable data center and enterprise game and it’s an exciting development for investors.