ATVI - AMD: What To Do Ahead Of Q2 2023 Financial Report

2023-07-18 10:27:33 ET

Summary

• Advanced Micro Devices, Inc., one of the key players in the global semiconductor market, is expected to publish its financial report for the second quarter of 2023 in the next two weeks.
• According to Gartner's report, shipments by leading companies in the global PC market were starting to recover and showed an 8.1% increase compared to the previous quarter.
• Despite a decrease in revenue in two business segments, AMD's share price has grown by 80.1% since the beginning of 2023, outperforming major tech competitors.
• After refusing to cooperate with Nvidia on the DGX Cloud project, the likelihood that Amazon will use AMD's new artificial intelligence chips in its projects has skyrocketed.
• We initiate our coverage of Advanced Micro Devices with a "hold" rating for the next 12 months.

One of the key players in the global semiconductor market, Advanced Micro Devices, Inc. (AMD), is expected to publish its financial report for the second quarter of 2023 in the next two weeks. Although AMD has not yet confirmed the exact date, Seeking Alpha anticipates that it will be published on August 1, 2023, which is standard practice for the company and does not involve the release of extraordinary revenue or net income results.

In recent years, the company has continued to increase its share of the global CPU processors actively market through innovative approaches in the development and implementation of Ryzen processors built on the Zen microarchitecture, which have shown high energy efficiency and performance compared to Intel products and AMD processors of previous series.

In addition, the company's GPUs are gaining popularity and starting to compete more strongly with Nvidia Corporation (NVDA), thanks to the AMD Radeon series for desktops and laptops. For example, the Radeon RX 7900 XT and Radeon RX 7900 XTX graphics cards, built on the high-performance AMD RDNA 3 architecture, which provides process optimization, also have AMD Infinity Cache technology, which significantly increases the memory bandwidth.

Moreover, Sony PlayStation and Microsoft Xbox game consoles contain AMD's SoC products that use the RDNA GPU architecture, which is superior in power efficiency and performance to competitors. This is especially important following the recent news of Microsoft's (MSFT) victory in the battle with the US Federal Trade Commission and the information that the UK Competition and Markets Authority will reconsider its acquisition of Activision Blizzard (ATVI). As a result, we can expect increased competition in the global gaming market. The reason for this is the need for Sony Group (SONY) to increase investment in game development and accelerate the release of next-generation game consoles not to lose its share in this market.

In the second half of 2023, there may be an additional source of cash flow through a partnership with Amazon Web Services (AMZN). After refusing to cooperate with Nvidia on the DGX Cloud offering, the likelihood that Amazon will use AMD's new artificial intelligence chips in its projects has skyrocketed. According to Reuters , AWS has not yet made any official announcements about plans to use AMD MI300 chips, but Dave Brown informed the company's intention to consider the possibility of introducing them.

Thanks to strong business momentum and AI hype, AMD's share price is up more than 80% since the start of 2023, outperforming technology-sector competitors such as Intel Corporation (INTC), Micron Technology (MU), and Texas Instruments (TXN).

We initiate our coverage of Advanced Micro Devices with a "hold" rating for the next 12 months.

The financial position of AMD and its prospects

AMD's revenue for the first three months of 2023 was $5.35 billion, down 4.5% from the previous quarter and 9.2% from the first quarter of 2022. The key culprit behind the drop in the company's revenue is the Client segment, which is focused on developing and commercializing the CPUs, various chipsets, APUs, and graphics processors for personal computers. Aggregate sales in this segment were $739 million in the first three months of 2023, down about $1.39 billion from the prior year due to lower prices and shipment volumes of client processors.

Even so, AMD's actual revenue has beaten analyst consensus estimates in eight of the past nine quarters, suggesting that Wall Street is underestimating its innovation activity during a challenging period for the semiconductor industry. In general, we believe that since the beginning of Q3 2023, the pace of its recovery has increased after a sharp decline in consumer demand for personal computers in 2022, which will positively impact the company's financial position.

According to Seeking Alpha , AMD's Q2 2023 revenue is expected to be $5.17-5.6 billion, up 0.6% from analysts' expectations for Q1 2023. While according to our model, the total sales of the company's products and services will be $5.56 billion. This figure is within the guidance of AMD's management, which expects revenue to be approximately $5.3 billion, plus or minus $300 million.

Revenue growth quarterly will be provided mainly by two sectors. The first of these is the gaming segment, which in its product portfolio, in addition to discrete GPUs, has an accelerated processing unit ((APU)) that combines a CPU and GPU on a single chip. This solution benefits power efficiency and system size, making AMD a leader in this rapidly growing market. The company's key customers in this segment are Microsoft and Sony, which purchase AMD's chips for PlayStation and Xbox Series consoles.

Sony Group Corporation has not yet revealed the exact release date for the PS5 Pro. However, based on historical data on the release of the previous PS4 Pro model, it can be assumed that this will happen in the second half of 2024. Overall, there was a noticeable performance boost from PS4 to PS4 Pro, released in 2016, thanks to 36 next-generation GCN compute units.

With AMD unveiling a new generation of graphics cards powered by the RDNA 3 architecture in the fourth quarter of 2022 that deliver higher frame rates when using ray tracing and support for games up to 8K, the Japanese company now has the technological capability to accelerate the development of its new game console.

At the same time, the main competitor of PlayStation, namely Xbox, continues to expand its business. On July 16 , Phil Spencer stated that the company had signed an agreement to keep Call of Duty on the PlayStation following its $69 billion takeover of Activision Blizzard. We believe this news, combined with the company's victory in the battle with the US Federal Trade Commission and information that the UK Competition and Markets Authority will reconsider Microsoft's acquisition of Activision Blizzard, makes it highly likely to be closed. As a result, we can expect increased competition in the global gaming market. This will require Sony to increase investment in game development and accelerate the release of a new generation of game consoles not to lose its share in this market.

We forecast the company's Gaming sector revenue for the next five years. Thus, according to our estimates, its total sales will amount to $7.45 billion in 2023, an increase of 9.5% compared to the previous year, and this figure will reach $11.93 billion by 2027.

In addition to the gaming segment, one of the main influences on the company's financial position is the Client segment, whose revenue was about $739 million, down 65.2% year-over-year. However, this segment's sales decline was expected due to the sharp drop in consumer demand for personal computers in recent quarters. However, according to Gartner's report , shipments by leading companies in the global PC market were starting to recover and showed an 8.1% increase compared to the previous quarter. We estimate that total personal computer sales will grow by double-digit percentages from the third quarter of 2023, increasing the margins of the company's Client segment and reducing the impact of short sellers on AMD's share price.

AMD's EBITA margin in Q1 2023 was 12.67%, despite a strong recovery quarter-on-quarter, but below its median of 17.92% between January 1, 2021, and the end of March 2023. We forecast that by 2023 the company's EBITA margin will reach 17.5%, and by 2024 this value will increase to 24.5%, also due to the synergistic effect after the completion of the acquisition of Xilinx, which is the market leader in FPGAs and adaptive computing. On June 13 , AMD announced new details about the MI300X, an artificial intelligence chip with 192 gigabytes of memory. Its release will begin this quarter, and mass production will start in the fourth quarter of 2023. As a result, the company will become the main competitor for NVIDIA's H100, which is especially important after Amazon's refusal to cooperate with them on the DGX Cloud offering.

According to Seeking Alpha , AMD's Q2 2023 EPS is expected to be $0.53-$0.64, up 1.8% from the consensus estimate for Q1 2023. While we believe this is slightly underestimated, our model puts the company's EPS at $0.66, given the solid progress made in the year's first half. At the same time, AMD's Non-GAAP P/E [TTM] of 38.52x is 98.21% higher than the sector average and 31.26% lower than the average over the past five years. On the other hand, Non-GAAP P/E [FWD] is 40.25x, which indicates that the company is overvalued in the current hype around generative AI and economic recovery in the U.S., China, and the European Union.

AMD beat the consensus EPS mainly because of new product launches and improved business margins, not the share repurchase program. For the first quarter of 2023, AMD bought back its shares for about $262 million. On the other hand, at the end of March this year, the remaining authorization to buy back the company's shares amounted to $6.3 billion . We estimate that this will allow CEO Lisa Su to reduce the company's share price volatility during the current period of heightened tensions between the U.S. and China.

At the end of the first quarter of 2023, AMD's total debt stood at about $2.85 billion, a significant increase from 2021 due to the acquisition of Xilinx. However, even despite a substantial increase in the company's EBITDA in the last quarter, total debt/EBITDA rose from 0.16x to 0.72x.

With AMD's total debt/EBITDA ratio below 1x, diversified business, stable cash flow, and the start of commercialization of MI300X, we don't expect the company to have difficulty redeeming its senior bonds maturing between 2024 and 2052.

Conclusion

Although AMD has not yet confirmed the exact date, Seeking Alpha anticipates that it will be published on August 1, 2023, which is standard practice for the company and does not involve the release of extraordinary revenue or net income results. Overall, we believe that the company's management will be able to surprise Wall Street with financial results, thanks to the launch of new products, the quarterly increase in shipments by the leading companies in the global PC market, and lower inflation.

At the end of the second quarter , the company introduced its new Ryzen PRO 7040 and Ryzen PRO 7000 series processors for desktops, built on TSMC's 4nm and 5nm process technologies, respectively. In addition to higher performance and power efficiency than the previous series of processors, the chips can handle various artificial intelligence tasks. Consequently, this may tempt buyers to choose devices made with these CPUs rather than those powered by the Apple M2 Pro or Intel.

Regarding technical analysis, AMD's share price recently bounced off the 50-Exponential Moving Average ((EMA)) support, and after a short rally, it started correcting again. We expect a continuation of the corrective movement up to a strong support zone in the $105 to $106 per share, where the 100-day EMA is located. After that, the price of AMD's shares will again continue to move upwards to break through resistance, thus marking Wall Street that the most speculative market participants are once again bullish on the company and its plans to increase its share in the global gaming and AI markets.

We initiate our coverage of Advanced Micro Devices, Inc. stock with a "hold" rating for the next 12 months.

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