Even a mediocre business can perform well when the wind is blowing at its back, but it takes a special business to outperform in tough conditions. Advanced Micro Devices, Inc. (NASDAQ: AMD) delivers very well and outshines its main competitor, Intel (INTC).
For investors with a long-term horizon and the ability to weather short-term economic uncertainty, AMD shares are trading at a more than reasonable valuation given the quality of the company and its growth opportunities. growth.
To provide some context to the data, it’s worth noting that AMD’s biggest competitor – Intel – posted a 17% drop in year-over-year revenue for the second quarter. Intel said Datacenter and AI Group sales declined 16% due to “continued adverse market conditions.”
On the other hand, AMD figures confirm that the company is performing at a high level and gaining market share from its main rival.
Revenue grew 70% year over year to a record $6.6 billion.
For the third quarter, AMD forecasts revenue of $6.7 billion, plus or minus $200 million. The forecast is a little lower than the $6.82 billion forecast on average by analysts at the time of the report.
AMD previously announced a new segment reporting format to begin in the second quarter. This is more relevant in terms of end markets and strategic initiatives.
- The Data Center segment includes server processors, data center GPUs, Pensando and Xilinx data center products.
- The Customer segment includes processors and chipsets for desktop and laptop PCs.
- The Games segment includes discrete graphics processors and semi-custom game console products.
- The Embedded segment includes AMD and Xilinx embedded products.
The company has also released historical data based on this new format to make comparisons more informative.
Data center demand grew 83% year over year, with an operating margin of 32% of revenue.
The on-board segment is remarkably profitable, with an operating margin exceeding 50% of revenue.
Management expects the Data Center and Embedded businesses to contribute more than 50% of company revenue in the future, compared to a contribution in the 40% range currently.
This trend should be quite favorable for AMD, as it should have a positive impact on both revenue growth and profit margins going forward.
Looking at non-GAAP numbers, excluding the impact of acquisitions, Advanced Micro Devices is a largely profitable business at the operating level and at the bottom line.
CEO Lisa Su said on the conference call that a quarter ago they expected the PC business to be down in the “high numbers” in the third quarter, and now they’re falling. expect activity to decline “by mid-teens”.
This is arguably the main factor explaining why the third quarter forecast is a bit soft compared to Wall Street expectations.
During the conference call, management was asked if they thought competitors’ excess inventory could put additional pressure on the PC business compared to current expectations, and Lisa Su replied that she thought they were doing already conservative assumptions for PC activity (emphasis provided):
In the current full-year and second-half guidance, what we’re saying is that we continue to see strong demand in the data center, in our embedded business, as well as in the console business. And we’re more conservative in our PC outlook. Our PC outlook now in the mid-teens would put the market somewhere around, let’s call it, 290 million to 300 million units. So I believe that we have properly minimized the risks associated with PC activity.
In terms of inventory, as we look at the current situation, given some of the COVID lockdowns and things in the second quarter. I think there was a bit of a buildup in PC inventory, and we took that into account in the second half. We think AMD’s share is modest. And suddenly, it will rebalance itself in the second half.
AMD management appears confident in its chances of exceeding expectations in other areas in the second half. This could arguably offset any additional PC weakness beyond current expectations:
So overall I think we felt very good about the second half. And again, with the portfolio that we have, one of the things that was significant is that we were still constrained in supply in a number of areas. Admittedly, on the Embedded side, we were constrained by supply in the second quarter. And even on the server side, we were tight in the second quarter. We have additional supply coming online, especially as we approach the end of the year. It will really help us to meet customer demand more. So we’re pretty happy with all these put and sell options.
Analysts on the conference call had a lot of questions about the data center segment, especially after seeing Intel’s weak numbers in this sector.
Jefferies’ Mark Lipacis had very specific questions about AMD’s market share gains over Intel in the quarter. The analyst calculated that AMD gained a record 6.6% over Intel last quarter, reaching market share in the mid-20s for AMD.
The analyst wanted to know if these calculations made sense or if perhaps something was missing due to the larger contributions from acquisitions.
Lisa Su clarified that the calculations were “in the correct zip code” and that there was no outsized contribution from the Xilinx and Pensando acquisitions:
I think your calculations are in the zip code from our point of view. And we are happy to gain market share. I think we expected that as the product portfolio expands, as we increase the offering, as we increase the number of instances across all tenants, we would see market share gains. And we will continue to focus on that in the future.
It’s great news to see AMD focus on artificial intelligence, as it’s a massive opportunity that could see the company far exceed market expectations in the years to come.
AMD is well behind Nvidia (NVDA) at this stage of AI, but the opportunities are huge and there should be enough room for several players to succeed in this market:
Our biggest opportunity is in AI, and we have already begun executing new hardware and software roadmaps to capture the significant opportunity we see to drive pervasive AI in the cloud, edge, and endpoints.
AMD stock is currently trading at around 20.5 times earnings estimates for 2023. This is a significant premium over other semiconductor names in the market, but it’s not at all excessive for a company of such quality with well above average growth prospects.
To give a dynamic perspective, the graph below shows the evolution of the Enterprise Value / EBITDA – Capex ratio to have a proxy for free cash flow generation. If AMD meets growth estimates, the ratio will drop from 19 at the end of this year to 11.4 in December 2025.
In the paragraph above, the phrase “If AMD meets growth estimates” is crucial. Stock prices reflect market expectations and valuations are often – not always – roughly in line with current expectations.
The key to finding superior opportunities is to invest in companies that can consistently exceed long-term growth expectations. If the fundamentals beat expectations, the stock price will generally tend to rise to reflect those improved expectations going forward.
In the near term, there is downside risk to earnings due to macroeconomic headwinds. The global economy is subject to enormous uncertainty and there is always a lot of cyclicality in semiconductors.
Over the long term, however, AMD has an impeccable track record of far exceeding expectations by making the right strategic decisions to grow in the most promising areas and executing strategy at a high level.
The graph below shows how the revenue, EBITDA and earnings per share estimates for 2022 have evolved over the past five years. To be clear, we’re not looking at revenue or earnings growth, we’re looking at how current year revenue and earnings estimates have changed over time.
In August 2017, Wall Street expected AMD to make $5.04 billion in revenue in the year 2022. Now they estimate $26.25 billion in sales for the same year. Earnings per share estimates rose from $0.1 to $4.35.
Looking at this data, it’s easy to see how a static assessment can be so limited and short-sighted. If the company can provide several times the current revenue and earnings estimate, then the stock is far more undervalued than the valuation ratios currently indicate.
In AMD’s case, there is some uncertainty about financial performance in the coming months due to macroeconomic factors. Longer term, however, the company has proven to have an exceptional ability to perform at a high level and significantly exceed market expectations.
It’s not an easy time to invest in semiconductor stocks. Economic risk, industry cyclicality and geopolitical tensions with China over Taiwan create considerable uncertainty around the sector.
On the other hand, if you have a long-term time horizon, meaning at least 3 years and ideally much longer, this short-term uncertainty can be a key source of long-term opportunity. Economic headwinds come and go, and great companies can stay great for decades if they have the right management team.
Under Lisa Su’s leadership, AMD has one of the best management teams in the industry, as evidenced by both qualitative factors and financial performance.
Based on current price levels, AMD is positioned for attractive returns under conservative assumptions. If the company can continue to exceed expectations going forward, the upside potential could be remarkable.