2023-08-03 14:29:05 ET
Summary
- We’re upgrading Advanced Micro Devices, Inc. to a BUY in the hopes of an AI boom possibility.
- Clearly, the near-term muted cloud/enterprise capex spending and the industry pivot to A.I. servers had a negative impact on AMD's datacenter financial performance resulting in lowered FY2023 outlook.
- Additionally, AMD's results and guidance confirmed our thesis of moderating share gains against Intel.
- While we still believe AMD’s A.I. accelerator offerings will lag behind Nvidia Corporation’s, we see more wiggle room for AMD to navigate due to the severe shortage of Nvidia's supply.
- We now recommend investors explore favorable entry points on this pullback, as we expect AMD to ride the A.I. trend into 2024.
We're upgrading Advanced Micro Devices, Inc. (AMD) to a buy from a sell, as our previous investment thesis concerning the muted cloud/enterprise capex spending and cloud customer shift to A.I. servers negatively impacting AMD's data center financial performance has played out. This quarter, the company reported Non-GAAP EPS of $0.58 and revenue of $5.36B, flat sequentially and down 18.2% Y/Y accounting for a steeper Y/Y revenue drop from last quarter , where revenue dropped 9.2% Y/Y and 4.2% sequentially to $5.35B.
We're seeing AMD's financial performance be pressured by moderating share gains against Intel Corporation ( INTC ), macro weakness, tightening cloud and enterprise capex spending, and cloud customers favoring A.I. over traditional compute spending. The following graph outlines AMD revenue in billions up to 2Q23.
Management guided for $5.7B (plus or minus $300M) for 3Q23, lower than the consensus of $5.85B. AMD's results this quarter confirm our investment thesis that the company would not experience significant A.I.-related revenue growth in the near term; our upgrade, however, is driven by our belief that while AMD's A.I. accelerator offerings do lag behind Nvidia's ( NVDA) current products, we see room for AMD to ride the A.I. trend upward due to the limited supply in the current market.
In NVDA's 1Q23 earnings call , the company highlighted that demand in 1H23 outweighed supply, noting on the call that to address this, "We believe that the supply that we will have for the second half of the year will be substantially larger than H1." Due to the A.I. boom, demand for A.I. accelerator products is expanding; NVDA continues to be the clear winner of the 2023 design win cycle, and our expectation of AMD's moderating outperformance has played out. We now expect AMD to be better positioned to participate in the A.I. accelerator market due to the severe shortage facing NVDA. We're upgrading the stock in hopes of A.I. boom possibility.
The stock is up 71% YTD, outperforming the S&P 500 (SP500) by 53%. AMD stock dropped roughly 12% since announcing 2Q23 results and outlook for the next quarter. Our previous sell rating was based on the thesis that investors were too bullish on AMD's data center business; we believe AMD's A.I. growth exposure promises have been put under investor scrutiny this quarter and see a similar situation playing out for Broadcom ( AVGO ) and Marvell ( MRVL ) earnings this quarter.
The market saw an A.I. rally that was driven by fumes rather than fundamentals; Taiwan Semiconductor Manufacturing Company Limited (TSM) earnings results this quarter confirmed that not all semi-players will benefit from the A.I. demand tailwinds, as the results highlighted that the A.I. boom wasn't able to offset the macro weakness. We now see a more favorable risk-reward scenario for AMD's A.I. growth exposure and recommend investors look into entry points into the stock on pullbacks.
The following graph outlines our rating history on AMD.
Moderating financial performance played out, what's next?
Our downgrade on the stock was driven by three expectations that we saw play out over the past two quarters; the following breaks down AMD's financial performance moderation and our expectations for 2H23 and 2024.
1. Near-term Muted Cloud/Enterprise capex spending & Industry Pivot to A.I. Servers
AMD rode the A.I. sentiment higher in 1H23 after NVDA guided for $11B in sales for 2Q23 and after AMD's Data Center & AI Technology Premiere; we were bearish on the stock as we didn't expect AMD would see meaningful A.I. revenues in 2H23 and would be pressured by the A.I. boom in other ways. AMD's Data Center sales dropped 11% Y/Y this quarter and grew 2% sequentially due to customers refilling inventory and initial shipments of the Genoa CPU. We think AMD is experiencing the grunt of the softer cloud and enterprise capex spending in 2023. We think the A.I. boom resulted in customers' focusing cloud capex dollars spent on A.I. accelerators and, in turn, reducing their traditional compute investments.
We also believe the softer cloud/enterprise traditional spending is due to macro weakness; we've seen weaker cloud spending reflected in Seagate (STX), Microsoft (MSFT), and Western Digital Corp ( STX ) earning results this quarter. We now think AMD is better positioned to grow A.I. revenues due to tight supply in the current A.I. market.
2. Moderating Share Gains Against INTC
AMD took a leap in share gains against INTC in the PC and data center markets in 2022; in mid-March, we forecasted that the company's share gain against INTC would moderate materially this year in comparison to 2022 and have seen this play out in FY23 so far. Last quarter, we saw AMD underperform INTC in its PC Client revenue; in 1Q23, INTC reported a 38% Y/Y drop in its Client Computing Group revenue versus AMD reporting a 65% Y/Y drop in Client revenue. This quarter, AMD's Client net revenue dropped 54% Y/Y to $2,152M but grew sequentially by 35%; meanwhile, INTC's Client Computing Group revenue dropped 12% Y/Y to $6.78B and rebounded 18% sequentially. The earnings this quarter confirm AMD's moderating share gain against INTC. Both companies were negatively impacted by the post-pandemic PC slump; we're now seeing the PC market recover due to inventory digestion and seasonal inventory replenishment for back-to-school season.
Additionally, in the data center market, we're seeing AMD share gain against INTC stall. AMD reported data center sales rebounded 2% sequentially to $1.32B, down 11% Y/Y, while INTC reported Data Center and A.I. Group sales up 8% sequentially and down 15% Y/Y to $4.04B.
The following chart outlines AMD PC Client and Data Center results in relation to INTC.
Segment / Quarter | 3Q22 | 4Q22 | 1Q23 | 2Q23 | ||||
AMD | INTC | AMD | INTC | AMD | INTC | AMD | INTC | |
PC Client | $1,022M | $8.1B | $903M | $6.6B | $739M | $5.8B | $998M | $6.8B |
Data Center Sales | $1,609M | $4.2B | $1,655M | $4.3B | $1,295M | $3.7B | $1,321M | $4.0B |
TSP
3. Design Wins in 2023 A.I. chips race
While we still believe AMD's A.I. accelerator offerings will lag behind Nvidia's current generation products, we do see more wiggle room for AMD to navigate as a result of the severe shortage of NVDA's supply. We continue to believe AMD is late to the 2023 design wins in comparison to NVDA; we think AMD's current MI300 products are better suited for a case-to-case basis, but we're constructive on MI300x which management noted on the call is experiencing "very high" engagement for the offering which is due for release in 4Q23. So, we continue to believe NVDA has the upper hand in the design wins for 2023 as H100 is already over nine months old, and the company has the upcoming Hopper-Next GPU. However, we think AMD's Hail Mary is the severe supply shortage NVDA is dealing with now.
Our upgrade is largely driven by our belief that AMD is now better positioned to experience A.I.-related revenue growth. Management continues to expect their data center business to be "up high single-digits year-on-year, we see much better second half compared to first-half." We do think AMD's performance will improve in 2H23 relative to 1H23 and recommend investors buy into the stock at current levels.
Valuation
AMD is relatively expensive, riding higher multiples on the A.I. sentiment. On a P/E basis, the stock is trading at 39.3x C2023 EPS $2.78 compared to the peer group average of 30.7x. The stock is trading at 7.5x EV/C2023 Sales versus the peer group average of 6.1x. The stock is trading at premium multiples, but we do see attractive entry points post-earnings pullback and recommend investors buy the stock at lower levels.
The following chart outlines AMD's valuation against the semi-peer group.
Word on Wall Street
Wall Street is bullish on the stock and has been for the greater part of the past year. Of the 45 analysts covering the stock, 31 are buy-rated, 13 are hold-rated, and the remainder is sell-rated. The stock is currently priced at $109. The median sell-side price target is $143, while the mean is $137, with a potential 25-30% upside.
The following charts outline AMD's sell-side ratings and price targets.
What to do with the stock
We're upgrading Advanced Micro Devices, Inc. in hopes of the stock experiencing an A.I. boom possibility similar to NVDA's A.I. boom. Our previous sell rating was based on the thesis that investors were too bullish on AMD's data center business; we do think it'll take time for AMD to meaningfully monetize and navigate in the A.I. accelerator market, but we believe the severe shortage of NVDA's supply works in AMD's favor. We believe AMD won't experience an immediate upside similar to NVDA, guiding over 50% ahead of consensus estimates last quarter. Still, we now see a more favorable risk-reward profile for AMD.
We believe the time to sell AMD has passed, and now is the time to buy back; we recommend investors take advantage of the pullback post-earnings and explore attractive entry points into the stock to ride the A.I. trend into 2024.
For further details see:
AMD: Upgrading To Buy In Hopes Of An A.I. Boom Possibility