Advanced Micro Devices | AMD

Jul 31, 2023

Team RED is READY
As with any competitor, a quarterly earnings report from a peer can provide great insight into the market. For Advanced Micro Devices, the Q2'23 earnings report from Intel provides great views on the surging demand for AI chips and a rebound in PC demand crucial for AMD

The most immediate signal from Intel beating Q2'23 estimates and guiding up for Q3 is the rebound in PC demand. Most importantly, the inventory correction appears over with OEMs no longer digesting chip inventory.Back in Q3'22, AMD shocked the market by cutting PC revenue estimates by $1 billion. The company quickly went from $2 billion in quarterly CPU sales for PCs to less than $1 billion.

Intel still reported Q2 Client Computing revenue was down 12% YoY to $6.8 billion, but the number was up $1.0 billion sequentially. The chip giant guided up Q3 revenue to $13.4 billion, up $0.5 billion sequentially.In Q1'23, AMD reported that client revenues had fallen further to only $739 million. AMD CPU revenues are now far over $1 billion per quarter below the peak levels providing substantial upside potential when the PC market normalizes.

Intel discussed a mixed picture for their business in the near term due to AI. The chip giant is seeing a wallet share shift from the sever CPU spend towards AI chips.The move is both good and bad for AMD. The company has the MI300 AI GPU chip hitting the market in Q4 providing a strong competitor to the booming demand for the H100 from Nvidia, but the chip isn't out on the market yet.

In the near term, AMD may see some suppressed data center demand while heading into 2024. Ultimately, the company should see upside from AI demand for the MI300 along with the Alveo AI accelerator.On the Q2'23 earnings call, Intel CEO Pat Gelsinger suggested the AI pipeline for 2024 had surged to $1 billion: In my formal remarks, we said we now have over $1 billion of pipeline, 6x in the last quarter.

Going back a few months, Morgan Stanley had estimated the AI potential for AMD was only $400 million with upside potential to $1.2 billion. The Intel forecasts would suggest the AI potential for AMD is far higher next year when the MI300 is in full-scale production.

Nvidia guided up current quarter sales estimates by 50% to over $11 billion. The company suggested data center sales would reach $7+ billion in the quarter.

AMD has only seen data center sales reach $1.3 billion in quarterly sales leaving a huge gap from Nvidia. Even Intel still hit $4.0 billion in data center sales during Q2'23, though the amount is down nearly 20% form 2022 levels due in part to losing market share to AMD.

The big issue for AMD is whether data center sales growth stalls causing a miss to 2H sales targets while booming AI demand ultimately boosts sales starting in Q1'24, or maybe Q4. The chip company peaked at quarterly sales of $6.6 billion back Q2'22 and the current quarterly analyst estimates aren't very aggressive.

A rebound in PC demand to more normalized levels places AMD back at the Q4'23 revenue target of $6.5 billion alone. A PC rebound to normal digestion ($2 billion quarterly run rate) along with higher data center or AI demand leads to vastly higher revenues in 2024.

The current analysts aren't even factoring in much growth in the Q2'24 revenue estimate of $6.76 billion. The amount is just 4% upside from Q2'22 despite potentially surging demand from AMD entering the AI GPU space.

AMD is set to report earrings after the close on August 1. Investors should focus less on the Q2 numbers or even Q3 guidance and focus more on a return to more normalized revenue levels plus the upside from AI.Our view has long held that AMD has the earnings potential of $5 to $6 and the AI opportunity is all upside to this view.

The key investor takeaway is that AMD is still $50 below all time highs while Nvidia has soared over $100 above the late 2021 highs. Investors should use the current weakness in AMD to load up on the stock while leaving some capital to buy any weakness following Q2 earnings due to the potential for near term disappointment leading to long term opportunities.

Aug 2, 2023

Note

After the bell on Tuesday, we received second quarter results from chipmaker Advanced Micro Devices, Inc. The company has been a big winner so far this year, with shares almost doubling as investors look toward a return to revenue growth. While the Q2 results came in slightly better than expected, guidance was not that great, but shares rallied further anyway. As a result, I would suggest investors sell into strength as we re-examine the situation.

For Q2, AMD announced revenues of $5.36 billion. While this was down more than 18% over the prior year period, it did beat Street estimates by almost $40 million. Not counting last year's Q3 revenue miss, this was the second-smallest revenue beat since the start of the pandemic. Client revenues were the main drag, falling by more than half over Q2 2022, while the Data Center also fell by low double digits. The one bright spot was the Embedded segment, which showed 16% growth. Don't forget that AMD had given weak guidance three months ago, so the revenue beat for Q2 was mainly driven by reduced expectations. The graphic below shows overall segment data for Q2.

The sharp decline in revenues led to big hits all the way down the income statement. Even on a non-GAAP basis, gross margins fell by 4 percentage points year over year. With operating expenses actually rising slightly, the company's adjusted operating income was nearly sliced in half. Adjusted earnings per share at $0.58 did beat by a penny, but that was down significantly from $1.05 a year earlier. On a GAAP basis, AMD reported an overall operating loss and detailed that its net income was down 94% year over year.

While small beats are better than no beats at all, we can't say the same thing about guidance. AMD management guided to revenues of $5.4 billion to $6.0 billion, with the midpoint of that range missing the average street estimate of $5.85 billion by a decent margin. While this is a return to growth for the top line, analysts were looking for more than a 5% increase year-over-year and the midpoint suggests less than 3% growth. Non GAAP gross margins are forecast to rise by a percentage point sequentially.

When you throw in the after-hours rally, AMD shares are up nearly 90% so far this year. A lot of that has to do with competitor Nvidia giving tremendous guidance due to growth in the Artificial Intelligence ("AI") space a few months back that completely set the chip sector on fire. Last week, Intel reported solid results and gave strong guidance for Q3 as well. It appears that Intel's revenue troubles are behind it, which could be a major problem for AMD moving forward. AMD also did not repurchase any shares during Q2, so why should investors buy the stock if management isn't putting capital behind the stock as well?

AMD shares in the after-hours are currently going for about 27.5 times the expected 2024 adjusted earnings per share. That's a tremendous premium to Intel currently, going for about 20.2 times, and Intel is expected to show a lot more of an earnings rebound next year. At the same time, as the chart below shows, AMD shares have recently spiked above their 50-day moving average again (purple line). The average price target on the street going into this report was $134, but that might come down slightly given the weak guidance. In the end, AMD announced some mixed numbers on Tuesday afternoon. Q2 revenues and adjusted earnings beat estimates, but one must remember that expectations had to come down a bit for that to happen. Q3 guidance was soft as well, yet the stock is trying to hit a new 52-week high again.

Sep 11, 2023

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100%

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Jul 27

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Jul 29

Note

AMD is set to release its second quarter 2024 results on Jul 30.
AMD expects second-quarter 2024 revenues to be $5.6 billion . At the mid point of the revenue range, this represents year-over-year growth of approximately 6% and sequential growth of approximately 4%.

Jul 31

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AMD stock jumps after earnings beat driven by AI chip sales

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