AMD: Simply The Best
Advanced Micro Devices beat estimates on both lines for Q4 2022. Click here for my full earnings review and a look at AMD's prospects.
AMD: Simply The Best
Summary
- Advanced Micro Devices, Inc. beat estimates on both lines for Q4 2022.
- The performance in the data center market was great.
- Q1 may not be as good as Q4, but AMD still is the leader in its peer group.
- I do much more than just articles at Cash Flow Club: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Article Thesis
"Simply The Best" is not only a Tina Turner song but also what one could call Advanced Micro Devices, Inc. (NASDAQ:AMD) -- at least relative to its two most important peers, Intel Corporation (INTC) and NVIDIA Corporation (NVDA). The company's most recent quarterly results, reported on Tuesday afternoon, underline AMD's many strengths. Shares are more attractive than those of its two core peers.
What Happened?
AMD reported its fourth-quarter earnings results on Tuesday afternoon. The headline numbers looked like this:
A 16% revenue gain was a strong showing in absolute terms, and also outperformed versus what the analyst community had expected. On top of that, AMD managed to beat earnings per share estimates, which naturally is a good thing for shareholders as well. Let's take a look at the important factors for that and why I believe that AMD is a better pick than its peers.
AMD: Many Positives
AMD is not the largest semiconductor company in the world, neither by market capitalization, nor by revenues. Still, it's a major player in its business areas -- data center and PC CPUs and GPUs. AMD's chips are, on average, some of the most efficient chips in terms of power consumption relative to performance. That has always been an advantage, but it has become an even more important advantage in the recent past. A global energy crisis has made electricity more expensive in many markets, which is why going for an efficient chip results in larger cost savings relative to the past, when electricity was cheaper. At the same time, worries about an economic slowdown make many customers focus more on cost reduction efforts to better prepare themselves for a potential recession. The combination of these factors -- savings by switching to efficient chips are more meaningful due to higher electricity costs, and at the same time, savings are more important -- is highly beneficial for AMD.
But there are other positives at play on top of that. Growth in the data center market allows AMD to sell to more and more customers. Macro trends such as autonomous driving, artificial intelligence, the Internet of Things ("IoT"), and so on will require more and more computing power, and more and more of that will be processed via cloud offerings, i.e., in major data centers. With its data center product lineup, AMD is well-positioned: The 3rd Generation EPYC processors, for example, are the best-performing data center chips in the market for overall workload, and new introductions such as AMD's 3D V-Cache improve the EPYC series' performance in more specialized tasks such as technical computing.
At the same time, one of AMD's biggest competitors, Intel, is having major problems -- Intel fails timelines regularly and is not bringing products to the market at the time it planned to do, allowing AMD to gain market share. It is thus not surprising to see that AMD's and Intel's performance in the data center space was very different: While Intel saw its data center revenue drop by a horrendous 33% year over year in Q4, AMD's experience was very different -- the company was able to grow its data center revenue by an extremely attractive 42% year over year. Data centers will remain a growth market for many years, I believe, as major players such as Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta Platforms (META), and so on will continue to invest heavily to process growing data streams stemming from the aforementioned macro trends. At least Meta should also be investing heavily to build out processing power for its Metaverse unit. With AMD having top-tier technology in a growth market, where its important competitor Intel continues to fall behind, there is a good chance that AMD will generate compelling growth for years to come in this area, I believe.
Not everything was rosy in the fourth quarter, however. While AMD's data center business performed exceptionally well, some other units generated meager results. Gaming, for example, hasn't done too well. This is easily explained by the fact that consumers are spending less on discretionary purchases in a high-inflation world, where they have to focus their spending on necessities such as food, shelter, energy, gasoline, and so on. Gaming revenue benefitted a lot from the pandemic with its stimulus payments and lockdowns that made spending "outside" harder. But with consumers now being less eager to make discretionary purchases, and with more "outside" options being available (travel, concerts, and so on), the market for gaming products has become harsher.
This was visible in AMD's results, as the company's gaming revenue declined by 7% year over year. That's far from a disaster, but still an underperformance versus what we saw during the pandemic and what we are seeing in areas such as data centers right now. I believe that this will be a temporary issues, however. Eventually, inflation will come back down to earth, and consumers will become more eager to spend on discretionary products again. At the same time, gaming remains a growth industry in the long run, as a growing portion of consumers enjoy the hobby and as a fast-growing middle class in countries such as China will allow more and more consumers to spend heavily on gaming equipment such as the products sold by AMD.
While the gaming business suffers from consumers being tight with money, the same holds true for AMD's client business. Consumers are buying fewer PCs, which is why the unit saw revenues pull back during the fourth quarter. The same trends are expected to remain in place during the current quarter, Q1, which is why AMD is forecasting that revenues will dip this quarter. The company's revenue guidance of $5.3 billion (midpoint) implies a 10% decline year over year -- with the ongoing gaming and PC slowdown being the major drivers. An expected revenue decline is not great, of course, but it's still pretty clear that AMD will outperform its peers: Intel has forecasted a 40% revenue decline for the current quarter, and NVIDIA is forecasted to experience a 21% revenue decline during the current quarter, according to the Wall Street consensus.
The current environment isn't good for semiconductor companies, but AMD clearly is the best performer during these tough times, I believe -- it has not only easily outperformed its two major peers in the recent past, but forecasts imply that this will also hold true for the near term.
AMD: The Best In Its Peer Group
At the same time, AMD also looks more attractive than Intel and NVIDIA due to additional factors. It does not only have the best recent and near-term revenue outlook, but also the best combination of profitability and valuation. Intel experiences massive profitability and cash flow headwinds and might have to cut its dividend. The company has seen its profits fall by almost 90% in the most recent quarter, and will generate a net loss during the current quarter. Intel has also burned through ~$10 billion of cash last year. NVIDIA is forecasted to see its profit fall by 26% this year, while the analyst community is forecasting a profit increase for AMD, as Q1 should be the nadir and since business growth should pick up again as the year progresses, e.g. due to stockpiles of GPUs declining.
And yet, AMD is the cheapest among its peer group by far:
AMD trades at 21x this year's expected net profit. That's not an especially low valuation in absolute terms, but considering AMD's long-term growth potential, that does not seem unreasonable at all. Its two peers are trading at a 50+ earnings multiple. In Intel's case, that's due to EPS estimates being pretty low for the current year due to the company's many problems, but that doesn't really mean that these valuations are justified. With AMD outperforming when it comes to product offerings, when it comes to business growth, when it comes to profitability, and with AMD still being the cheapest among these three by far, I believe it's fair to say that AMD is simply the best.
Timing And Risks To Consider
From a pure timing perspective, AMD is not the great buy it was a couple of months ago -- shares have risen 26% since my last bullish article three months ago. One could thus argue that waiting for a more opportune buying opportunity might make sense. But for someone looking to deploy money today, AMD looks like the best choice among its peers by far, both from a fundamental perspective and from a valuation perspective. Its upside potential is the largest while its downside risk is the smallest, I believe, relative to pricey INTC and NVDA.
Still, despite the fact that AMD looks better than its two core peers from a valuation and business performance perspective, it's not risk-free. Higher-than-expected inflation could result in more Fed tightening, for example, and growth stocks including AMD could see their shares pull back if that happens. A more severe recession, relative to what the market is seeing right now, could also result in share price declines, as profits would not be as high as currently forecasted by Wall Street in such a scenario -- a deep recession could hurt both the consumer-facing businesses (PC and gaming) as well as the data center business, in case major players such as AMZN decide to cut back their capital expenditures.
I do not see a deep recession as very likely, but it's a risk investors should consider. Last but not least, AMD's dependence on contract manufacturers such as Taiwan Semiconductor Manufacturing Company Limited (TSM) makes AMD vulnerable versus a potential escalation of the Taiwan conflict. If that were to happen, most chip stocks would be hit hard, but companies with their own fabs, such as Intel, would likely outperform versus AMD, NVIDIA, etc. that are operating with a fabless business model.
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Comments (25)
Lisa Su: Simply The Best
I invest in the "dependable" CEO Lisa Su leading the "tech-rich" AMD and managing the details and numbers for me, so I just need to monitor the product offering and enjoy my margarita and music, so far so good and sleeping well.
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But the Data Center growth is slowing, and AMD did not fully take advantage of the opportunity, as shown by the growth of new ARM-based processors.
In a couple of years, AMD will have to compete with RISC-V too.