BABA - AMD: Generative AI Gains Have Yet To Materialize
2023-08-04 09:42:46 ET
Summary
- AMD's Q2 double beat continues to support the presence of idiosyncratic strengths in its product roadmap for overcoming lingering cyclical challenges to the broader chip industry's demand environment.
- Despite the persistent PC market slump, and emerging weakness in datacenter sales due to soft enterprise cloud and communications infrastructure demand, 4th Gen EPYC and Instinct accelerator take-rates have soared.
- The latest results continue to underscore AMD's market-leading foray in capitalizing on the next significant growth frontier that is AI, which is value accretive to the stock from current levels.
AMD's stock ( AMD ) has almost doubled this year, climbing close to $130 apiece before slipping to the $110-range through July as markets pondered on the mixed demand environment. AMD’s second quarter results, highlighted by a double beat alongside management’s optimism for more prominent improvements to ongoing cyclical headwinds and better capture of emerging AI opportunities via its product roadmap in 2H23, had kept the stock resilient in post-earnings late trading. Yet, its valuation slipped in Wednesday trading (August 2), falling below $110 apiece alongside the broader market slump before regaining ground the following session.
Continued volatility in the stock continues to highlight investors’ angst over the cyclical situation in semiconductors, which remains fluid. Although industry names that have recently reported have unanimously been optimistic that the PC end markets – which were hardest hit – had bottomed in the first quarter with signs of gradual improvement in the demand environment headed into the second half of the year, the broader enterprise IT spending environment remains tepid, as corroborated by the continuation of declines in enterprise data center sales at AMD during the first half.
However, AMD’s progress in ramping up its product roadmap for 2023, which directly complements emerging AI tailwinds, is expected to provide an incremental boost to typical seasonality strength in the second half. This is further corroborated by management’s guidance for consolidated sales to return to growth with expanding margins exiting the current quarter, suggesting that AMD is turning a corner from the acute impact of cyclical challenges during the first half. Looking ahead, the anticipated industry recovery in the second half of the year, paired with seasonality tailwinds and a strong company-specific product roadmap, alongside ongoing market favouritism for names with quality fundamentals amid an uncertain market climate will remain value accretive factors and likely continue to support AMD’s longer-term upside potential from current levels.
Returning Growth Drivers
AI has been a key catalyst for markets this year, and the broader semiconductor industry has benefited from an ensuing lift given their mission critical role in enabling related developments, overshadowing the impact of lingering cyclical challenges. Despite flat sequential growth in data center sales – the bread and butter of the business – due to the uncertain enterprise IT spending environment during the second quarter, resilient demand for the EPYC server processors, particularly as 4 th Gen Genoa shipments ramp up, continues to highlight AMD’s emerging strength in AI and high-performance computing. Modest second quarter results in AMD’s core data center segment was largely expected given the evolving macroeconomic backdrop, alongside the ongoing transition from the 3rd Gen Milan EPYC server processors to the 4 th Gen Genoa EPYC server processors.
But continued ramp up in 4 th Gen EPYC applications will likely emerge as the key driver for data center growth in the second half of the year, considering the strength in related sales observed during the second quarter which was crucial in compensating for much of the lingering in enterprise sales.
Although market demand remains mixed, the 4th Gen EPYC CPU adoption accelerated in the quarter, with revenue nearly doubling sequentially as cloud provided expanded deployments to power their internal infrastructure and public instance offerings.
And this should not come as a surprise, given Genoa’s leading performance and total cost of ownership advantage for general purpose compute. Genoa delivers almost double the performance and power efficiency for “enterprise and cloud applications” compared to competing products available in the market. This makes for a strong advantage amid growing end market demand for cloud spend optimization, and can be corroborated by the acceleration of Genoa deployments in new virtual instances at public cloud providers.
In cloud, 30 new AMD instances launched in the second quarter, with multiple Genoa instances announced by AWS [ AMZN ], Alibaba [ BABA ], Microsoft [ MSFT ], and Oracle [ ORCL ]…In total, there are now more than 670 AMD-powered cloud instances publicly available, and we expect that number to grow 30%, to nearly 900 by the end of the year, driven largely by new Genoa deployments.
And the start of shipments for the new 4 th Gen EPYC variants optimized for AI and cloud applications in the second half of the year will likely further catalyse acceleration for data center sales ahead and bolster AMD’s capitalization of emerging secular tailwinds. Recall that Bergamo is optimized for “cloud-native applications”, which will likely appeal to the enterprise end markets despite their uncertain spending environment amid evolving macroeconomic uncertainties. This is corroborated by the deployment of Bergamo across enterprise server platforms in the current quarter, with partners counting Dell ( DELL ), HPE ( HPE ), Lenovo ( OTCPK:LNVGY / OTCPK:LNVGF ) and Supermicro ( SMCI ). Meta Platforms’ ( META ) adoption of Bergamo across their data center footprint also provides validation to the cloud-optimized technology, underscoring continued share gains for AMD ahead. Meanwhile, Genoa-X, which is optimized for “demanding technical computing workloads” is already being deployed by Microsoft Azure , generating “more than five times higher performance” over the chip’s predecessor. The upcoming deployment of Siena, which is optimized for telco infrastructure applications, in the third quarter is also expected to overcome some of the emerging “softness with communications customers” observed during the first half by spurring an upgrade cycle ahead.
More importantly, the AMD Instinct accelerators will be a game changer in the second half of the year as we had previously discussed , which is in line with acceleration observed during the second quarter. The Instinct accelerators have been critical in AMD’s AI roadmap, given their mission critical role in complementing the company’s growing prowess with the EPYC CPUs and bolstering prospective share gains on emerging AI opportunities. This tailwind is already becoming increasingly evident, as observed through the burgeoning growth in demand for the existing MI250 accelerators and emerging interest for the upcoming MI300 accelerators.
AI cluster engagements grew by more than seven times sequentially as multiple customers initiated or expanded programs supporting future deployments of Instinct MI250 and MI300 hardware and software at scale… We've also seen some strong interest in our MI250 accelerator, which is currently shipping right now. And we see very strong pull on the MI300 accelerators that are starting production in the fourth quarter.
Specifically, the fourth quarter launch of the MI300A and MI300X accelerators optimized for AI inferencing will likely place AMD in closer competition to current leader in the industry, Nvidia ( NVDA ). The latest MI300 series hardware based on the CDNA 3 architecture will not only complement the 4 th Gen EPYC CPUs to deliver competitive TCO and performance for end users, but also benefit from an accommodating full stack software with its ROCm platform. Taken together, ROCm makes a competitive tool relative to Nvidia’s CUDA in enabling the development of next-generation AI workloads, including large language models, alongside supporting hardware.
To make it easier for developers to tap into the full performance and features of our AI hardware, we delivered a significant performance and feature update in our latest ROCm software, and expanded support for AMD silicon across the leading frameworks, including PyTorch, TensorFlow, Onyx, and technologies like OpenAI Triton.
Paired with continued progress at AMD to build a “comprehensive software stack that can [also] accelerate networking, security, storage and other services for cloud, enterprise and edge applications” – including via ongoing integration of Pensando and Xilinx technologies across its product roadmap – the company remains well positioned in capitalizing on more than $150 billion worth of market demand for AI accelerators in data center alone over the next five years.
Valuation Considerations
Despite the mixed demand environment, market momentum for the AMD stock has stayed relatively resilient, holding gains of more than 70% this year, albeit modest compared to industry peers like Nvidia and other software names that have seen their respective valuations soar by multiple folds on the coat-tails of AI. And the nascent technology is expected to remain a core market driving theme ahead – mentions of “AI” and related topics during the latest earnings season has continued on the rise since OpenAI’s ChatGPT debut late last year, gradually overshadowing investors’ angst on ongoing macroeconomic uncertainties and looming recession fears. With AI likely to be a mainstay area of focus, and AMD positioned to bolster its share of ensuing growth opportunities, there remains durability to the stock’s longer-term upside prospects.
Specifically, AMD’s upcoming deployment of the next-generation MI300 accelerators will likely reinforce its reputation in AI developments, especially considering the critical role of related hardware and supporting software – such as ROCm – in accommodating the deployment of relevant technologies. And the positive feedback AMD has received on its Instinct accelerators from customers underscores robust demand prospects for the upcoming launch of MI300, especially given increasing compute demands from AI workloads. This is likely to drive incremental growth to AMD, in addition to benefits ensuing from the gradual improvements over looming cyclical challenges across enterprise data center and client computing sales in the second half of 2023. Taken together, the ensuing scale is also expected to drive durability in the ongoing pace of margin expansion observed at AMD in recent quarters, further benefiting the bottom line and, inadvertently, cash flows underpinning its valuation prospects.
Final Thoughts
Despite persistent y/y sales declines observed during the second quarter, pressured by macro-driven uncertainties in the enterprise cloud, communications infrastructure and client computing verticals, forward-looking markets are now shifting attention to AMD’s second half growth story, which demonstrates durability and tangibility given proven seasonality demand trends, complemented by a strong product roadmap ahead. AMD’s relatively modest uptrend this year compared to rival AI names, despite the chipmaker’s mission critical role in enabling AI innovations which represent a significant forward growth foray, continues to represent a reasonable risk-reward opportunity at current levels. The long-term bullish narrative on the stock, underpinned by its commitment to innovation and participation in secular trends ahead, remains intact despite transient cyclical headwinds in the industry, and impending optimism on acceleration in the second half is expected to unlock incremental pent-up valuation upside to the stock in the months ahead.
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AMD: Generative AI Gains Have Yet To Materialize