2023-08-03 06:28:17 ET
Summary
- The data center segment was mixed as cloud spend optimization continued and enterprise remained weak while Genoa and AI provided tailwinds to the business.
- Client segment was weak as expected but management expects strong growth in the second half of 2023 due to seasonality and a strong product portfolio.
- AMD's Instinct MI300X GPUs, which is meant to rival Nvidia's GPUs, is launching and ramping production in the fourth quarter of 2023.
- Management stated that customer interest for MI300X is "very high" and engagements expanded significantly in 2Q23.
- I would enter AMD at $84, which is at a 20% discount to my intrinsic value of $105.
AMD ( AMD ) just reported its 2Q23 earnings.
The key thing about AMD is the diversified business operations the company has, ranging from data center segment to the gaming, clients and embedded segment.
Thus, while it is certainly one of the beneficiaries of the strong AI demand, it has other moving parts that affect the investment thesis.
In my view, the weakness in some pockets within the AMD businesses are cyclical in nature and I am of the view that the long-term investment case for AMD remains solid as a result of leadership positions in multiple segments and strong growth tailwinds.
Let's dive right into the first segment, the data center segment.
Data center segment
The data center segment includes its data center and AI products, including server CPUs and GPUs, amongst others.
Data center segment saw revenue decline 11% from the prior year to $1.3 billion , and it is up 2% from the prior quarter.
Data center segment for 2Q23 (AMD)
AMD saw mixed market demand within the data center segment.
AMD's 4th generation EPYC CPU , also known as Genoa, saw revenue double from the prior quarter and led the sequential strength in the data center segment. In particular, cloud providers continued to expand deployments as there were 30 new AMD instances launched in the quarter, with several Genoa instances announced by Amazon's ( AMZN ) AWS, Alibaba ( BABA ), Microsoft ( MSFT ) and Oracle ( ORCL ), according to management. Genoa has been described as being able to bring about 1.9x more performance for cloud and enterprise applications and 1.8x more performance per watt than competitors. This simply means that Genoa is one of the most efficient and best performing server processor in the market today.
Management stated in the earnings call that there are about 670 AMD powered cloud instances today and they expect this to grow 30% to 900 by the end of the year. This growth is largely contributed by Genoa.
In addition, AMD also expanded its 4th generation server product portfolio with the launch of Genoa-X and Bergamo. Microsoft Azure said that its Genoa-X high performance computing instances offered 5x the performance in technical computing workloads when compared to prior generations. For Bergamo, AMD stated that they expect the offering to bring 2x the performance compared to competitors and Meta Platforms ( META ) is expected to be deploying Bergamo across their data center infrastructure footprint. In addition, other server providers like Supermicro, Dell, Lenovo are also launching their Bergamo platforms in the next quarter.
The enterprise side of data center remained weak as macroeconomic uncertainty led to weaker demand. In addition, major hyperscalers continued to see cloud spend optimization which led to these cloud providers optimizing their capital expenditures as well.
Management remained cautious about the mixed environment in the data center segment, as shown below :
In the datacenter market, we see a mixed environment as AI deployments are expanding. However, cloud customers continue optimizing their datacenter compute and enterprise customers remain cautious with new deployments.
Client segment
The client segment includes CPUs for notebooks, desktops and commercial workstations.
The client segment was weak in the second quarter as expected, as revenues fell 54% from the prior year to $1 billion , while sequentially, revenue was up 35%.
The sequential increase in client segment revenue was a result of significant growth in the Ryzen 7000 series CPU sales as a result of new notebook launches by the largest OEMs. AMD also launched new commercial offerings with its Ryzen Pro processors for notebooks and desktops. More than 100 AMD powered PC platforms will be launching in 2023 from leading OEMs like HP and Lenovo. In addition, AMD will be ramping its Ryzen 7040 mobile CPUs that is the first x86 processor in the industry with a dedicated AI engine.
Management expects client segment to grow as the second half of the year is typically seasonally strong. In addition, with the strong product portfolio, improving adoption of Ryzen 7000 CPUs, this will help drive sequential strength in the second half in the segment.
In addition, AMD sees significant PC demand growth coming as a result of AI as more software players like Microsoft include generative AI into their product portfolio. As a result, AMD continues to execute towards an AI processor roadmap that is expected to enable a PC experience that delivers generative AI applications.
Gaming segment
AMD's gaming segment includes desktop and notebook GPUs, game console and semi-custom System-on-Chips ("SoCs").
The segment revenue fell 4% year-on-year to $1.6 billion and fell 10% sequentially. The higher semi-custom revenue was more than offset by the weaker gaming graphic sales in the quarter. In particular, semi-custom SoC sales was strong as both Microsoft and Sony ( SONY ) saw healthy demand for consoles as a result of launches of new AAA games as well as improved retail availability worldwide. Within gaming graphics, in the second quarter, AMD expanded its Radeon 7000 GPU series with the launch of RX 7600 cards for 1080p gaming and are on track to expanding its RDNA 3 GPU offerings with the new Radeon 7000 series cards in the third quarter.
Embedded segment
The Embedded segment is made up of Field Programmable Gate Arrays ("FPGAs"), embedded CPUs and GPUs, adaptive SoCs for a wide range of markets.
Revenue for the segment came in at $1.5 billion , up 16% from the prior year and down 7% sequentially. There was a strong demand from customers in the industrial, vision, healthcare, automotive and broadcast sectors.
In the second half of the year, as a result of strong six quarters of growth in the segment, management expects revenue to decline in the second half as the business normalizes and customers reduce their inventories.
AI product roadmap
One of the most anticipated and promising announcements in the quarter was AMD's Instinct MI300X GPUs , which is meant to rival Nvidia's ( NVDA ) GPUs. AMD states that MI300X is designed by the company to be the most advanced accelerator for generative AI globally. The company expects to launch and ramp production in the fourth quarter of 2023 as they are currently providing sampling with potential customers now.
Most importantly, management stated that customer interest for MI300X is "very high", and that AMD saw its engagements with "top tier cloud providers, large enterprises and other leading AI companies expand significantly in the second quarter.
MI300X combines with AMD's CDNA 3 architecture to result in one of the largest memory footprint and fastest memory bandwidth in the industry, both of which are key for performing AI inferencing.
Management's tone around its AI roadmap is confident as highlighted by their commentary about customer demand and interest:
Our visibility is such that there are multiple customers that are looking to deploy as soon as possible.
With MI300X, revenue contribution will be small in 2023 given the ramp in the fourth quarter as I expect it to mostly come from Microsoft. Alphabet ( GOOG ) shipments will come in late in 2023 and Meta Platforms and Amazon likely taking shipments in 2024 as the business ramps.
Overall results, margins and profitability
Revenue fell 18% from the prior year as the growth in the embedded segment was offset by the weakness in the client segment.
Gross margins came in at 50%, down four percentage points compared to the prior year as a result of the poorer client segment results.
Operating expenses came in at $1.6 billion, an increase of 3% from the prior year as a result of higher investments in R&D. This led to operating income of $1.1 billion, down 46% from the prior year and operating margin came in at 20%.
The 2Q23 diluted EPS was $0.58 per share, down from $1.05 in the prior year as a result of the weaker client segment performance.
Guidance
AMD expects third quarter 2023 revenue to be at $5.7 billion in the mid-point, up 2.5% from the prior year and up 6.5% sequentially. This was better than market had feared as management expects client segment to be up in the next quarter, while data center to be somewhat flat, and the gaming and embedded segments to fall.
Gross margins are expected to be around 51% and operating expenses are expected to be $1.65 billion.
I think that this guidance does provide the market with improved confidence surrounding the revenue decline and weakness in its client segment.
Valuation
AMD is trading at 28x 2024 P/E.
I am applying a 30x 2024 P/E for my 1-year price target. I think that the valuation multiple is reasonable because of the stronger recovery in EPS after the weakness in the client segment we have seen in 2023. In addition, it is also reasonable for a company with strong growth prospects and leadership position in multiple segments like AMD.
As a result, my 1-year price target for AMD is $126, representing 15% and 44% upside potential.
My intrinsic value and 3-year price targets for AMD can be found in Outperforming the Market .
Conclusion
The story for AMD certainly has many more moving parts as a result of its different business segments in data center, clients, embedded and gaming.
I think the long-term investment case for AMD remains solid despite the current weakness in multiple pockets of its business as cloud spend optimizations continues and client segment business remains weak.
That said, the commentary about its AI roadmap and the strong interest and demand for its new AI products is very promising for AMD. This makes it second to Nvidia ( NVDA ) in terms of being able to compete with Nvidia in the AI business to come.
In addition, the weakness in certain parts of AMD's businesses are cyclical in nature and by no means imply any structural issues with the company. In fact, AMD continues to bring in innovative and leading products into its segments, thereby maintaining its leadership position in these businesses and grow its competitive moat.
My 1-year target for AMD is $126 representing 15% upside potential.
For further details see:
AMD: Solid AI Product Roadmap Solidifies Leadership Position