AMD Q3: Don't Lose Your Money
AMD is scheduled to release its Q3 results after market close on November 1. Find out why I remain bullish on the AMD stock.
AMD Q3: Don't Lose Your Money
Summary
- AMD is scheduled to release its Q3 results after market close on November 1.
- Analysts are extremely divided on the chipmaker's Q4 guidance, with low and high estimates differing by nearly 50%.
- This might be an opportune time for long-term investors to scoop AMD's shares amidst the ensuing market chaos.
Advanced Micro Devices, Inc. (NASDAQ:AMD) is scheduled to host its Q3 earnings call after market close this Tuesday, November 1. Although the company has already released a dismal set of preliminary Q3 numbers, there’s still a lot of uncertainty about the extent of its sales slump. So, in addition to tracking its headline financial figures, investors may also want to monitor its purchase commitments, guidance for the next quarter or two and its management's comments about their production trends amidst a recessionary environment. These items will better highlight where AMD and its shares may be headed next. Let’s take a closer look at it all.
The Preliminary Numbers
For the uninitiated, AMD pre-released its Q3 financials earlier this month on October 6. Its top brass was forecasting revenue of $6.7 billion for the said quarter, but the actual figure turned out to be $5.6 billion. Its margins, too, took a hit. Its management had guided for non-GAAP gross margins of 54% in their prior earnings report, but the actual figure is close to 50%.
The company noted in its press release that dropping average selling prices (or ASPs) resulted in a $160 million worth of a one-time inventory charge. Additionally, its sluggish unit shipments during the quarter resulted in a ”significant inventory correction.” To make matters worse, there’s ambiguity about the extent of its sales slowdown and no telling when the chipmaker will resume its growth trajectory. This uncertainty, in turn, fueled fear, uncertainty and doubt amongst the investment community and resulted in a sharp selloff in AMD shares shortly after.
Bear in mind that these are not final figures. As AMD closes its quarter and its accounting team makes final adjustments, I contend that the final numbers will fluctuate by up to 2% in either direction, for better or worse. But having said that, there’s still a lot to look out for, when the company releases its earnings report this Tuesday.
Key Items to Watch
For starters, look for AMD’s purchase commitments in its 10Q filing. This is basically the dollar value of all the cancellable and non-cancellable orders that AMD has committed to its third-party vendors.
If the chipmaker’s sales slump is accelerating, for whatever reasons there might be, then its management might look to cancel or defer some of its cancellable orders in order to avoid building excess inventory and creating a supply glut along the way. On the other hand, if its sales slump is short-lived, then the company might not tinker too much with its orders and they’re likely to build inventory to capitalize on consumer demand resumption.
There are already rumors of AMD cutting back on production in light of subdued consumer demand, but there hasn’t been any official confirmation for the same. So, tracking this purchase commitments figure will highlight AMD management’s view about the longevity of this sales downturn and indicate the extent of financial risk that they are undertaking while navigating this recessionary macroenvironment.
We must also look for management’s revenue and margin guidance for Q4 FY22 and possibly also for Q1 FY23. The chipmaker’s highly anticipated 7000-series CPU line-up became commercially available in the last week of September, which should, in theory, bring along ASP gains and margin expansion. The chipmaker’s top brass would have nearly one month of sales data to extrapolate their guidance for at least the next quarter. It’d be a cherry on the cake if the company guides for strong unit shipment growth as well, but I feel it’s unlikely considering the bleak macroeconomic environment and strained consumer budgets.
There is one area in particular where the company might outperform, though. Last month, U.S. regulators banned the exports of specific Nvidia (NVDA) and AMD-branded datacenter GPUs to China in order to prevent misuse by the Chinese military. This is a blow to Chinese datacenter operators as it creates a vacuum of enterprise-grade GPUs in the country, while domestic players are still several years away from catching up in terms of compute performance. So, until this ban comes into full effect, these frantic buyers from China might be looking to buy all the available enterprise-grade GPUs from Nvidia and AMD that are available in the market, regardless of their prevailing prices.
Nvidia is said to be already prioritizing the production of a specific data center GPU, and AMD might very well do the same, in order to tap this pocket of growth. So, look for AMD management’s data center revenue guidance in particular. I think it’s needless to say, but if the chipmaker is able to tap this opportunity, then it’s likely to issue an upbeat datacenter revenue guidance for Q4 FY22 and Q1 FY23.
Interestingly, the analyst community is extremely divided when it comes to AMD’s near-term prospects. Where some analysts are forecasting the chipmaker’s Q4 revenue guidance to be $4.79 billion, others are more bullish with a $7.06 billion estimate. This equates to a variation of a whopping 47% between low and high Q4 revenue estimates.
Preparing for Earnings
AMD may have reported its preliminary Q3 results, but there’s a lot of uncertainty about how severe its sales slump really is. This is particularly evident in widely contrasting analyst estimates. So, investors may want to keep a close eye on the company’s revenue and margin guidance, its purchase commitments, and its management’s comments pertaining to their production trends. These items should provide some clarity about what to expect from the chipmaker in near future and are likely to influence where its shares head next.
As far as valuations are concerned, AMD’s shares are trading at a significant discount compared to many of the other rapidly growing stocks in the semiconductor space. This suggests that most of the bad news relating to its sales slump is already priced into the stock at current levels. So, investors with a multi-year time horizon, who have the appetite for portfolio drawdowns and heightened volatility, may want to accumulate the chipmaker’s shares on potential price corrections. I, for one, remain bullish on the stock as detailed here and here. Good Luck!
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Comments (23)
The only reason AMD is "up" is including Xilinx and Pensando revenues as if those companies didn't exist or have revenues until they were merged into AMD earlier this year. The internals looking at AMD's legacy businesses show the strong growth is gone, and in the PC space has collapsed.AMD's client segment was down 53% QoQ and 40% YoY. Intel's was up 6% QoQ and down 17% YoY. Even with that performance Gelsinger said they're still under-shipping end demand to reduce inventories at their customers. Gelsinger said with regards to PC share that they are "now showing meaningful improvement," meaning Intel gained share, and that's easy to see from the above numbers.Looking at Q4, all signs indicate Zen 4 sales are very poor. What's holding up AMD sales are Zen 3 Ryzens, but those are heavily discounted with Zen 4 out, and Intel's Raptor Lake now launched and far superior to Zen 3 in performance.
How it is very strong? The 13.9% server share after 5 years is very strong? Just look at the 8% up QoQ in data center. Where is that growth coming from? Pensando was private so we don't know what its growth was prior to the acquisition, but the market that it's in is growing strongly from a small base. We do know that Xilinx's growth was much higher than AMD's when it was acquired. There's no reason to believe that AMD's legacy dclarata center business (EPYC) is growing. It's likely down QoQ.As for Zen 4, it's overpriced both for the processors and the platform cost. It's also being beaten across the board in performance save for a subset of heavily threaded workloads where the 7950X narrowly outperforms the Core i9-13900K. In the mid-range the Core i5-13600K easily beats the comparable Ryzens. You make the claim "AMD is still going to show that while growth has slowed, it hasn't gone into reverse the way Intel has" which clearly isn't the case. AMD's numbers vs Intel's as I showed in the prior comment clearly support Intel is gaining significant PC share. Stepping back the inflection point in PC competitiveness occurred when Alder Lake's first skus on Intel 7 were released in Nov 2021. Raptor Lake improves on that, and Intel just said in the conf call that the production stepping of Meteor Lake tapes out this quarter. Definitely in the PC space everything is very negative for AMD. They'll transition to Zen 5 until late 2024, and it will still be on TSMC's 5nm node, just as the current Zen 4 is.
If you already have a position in AMD that is profitable then it may be a good time to sell covered calls. Long term I like AMD as an investment but expect more downside after earnings.