AMD: Growth Story Finished
Excluding the Xilinx division, Advanced Micro Devices is headed for about 27% organic revenue decline. Find out why I'm bearish on AMD stock.
AMD: Growth Story Finished
Summary
- Excluding the inorganic Xilinx component, Advanced Micro Devices, Inc. is headed for around a 27% organic revenue decline going into Q1. The growth story is finally finished.
- As estimates are inevitably reduced, the rich valuation will only become richer.
- While AMD may be more diversified than competitor Intel, the ease with which investors are ignoring the PC bloodbath is too convenient.
- With a rich valuation and the end of the multi-year growth story, it is time for AMD investors to bail.
Investment Thesis
Advanced Micro Devices, Inc. (NASDAQ:AMD) stock moved up after the release of the Q4 earnings report. However, there was actually nothing in the report to support such a reaction. The results were in line with guidance, but the Q1 guide was below estimates, which likely will have to be reduced going forward along with those for the remainder of the year.
This means the P/E valuation will only further increase despite there being little to no growth on the horizon. As such, I am reiterating my thesis that the AMD turnaround growth story is finally finished. This means in the best-case the returns going forward are likely going to fall far below the record market cap gains from the last few years.
Background
Nearly a year ago at $111, I cautioned investors that AMD’s days of (high) revenue and EPS growth were likely over. Notably, the Xilinx merger was artificially inflating actual organic growth, in combination with the stock dilatation that it also caused: "Advanced Micro Devices Stock: Advanced Micro Delusion."
As argued, at some point, AMD will run into a brick wall in all of its segments. (…) Since the AMD thesis is played out, investors may be advised or contemplated to look for a new investment opportunity. For example, as one such proposal, when it comes to turnarounds, there is one such option nearby competing in AMD's very same markets: Intel.
Q4 earnings
AMD revenue of $5.6B compares to $4.8B in Q4’21, up 16% YoY. However, this included $1.4B of Xilinx revenue, without which the $4.2B report would have made for a 13% decline.
Considering the downside guidance from Nvidia Corporation (NVDA) in the back half of last year, AMD’s gaming segment revenue of $1.6B held up relatively well, marking a decline of just 7%, mainly due to the strength in semi-custom sales.
However, the client CPU segment, which could be seen as the legacy AMD business, performed yet again horrendously, with a 51% decline in revenue to $0.9B. While the argument could be made that, to AMD’s credit, the company is more diversified than Intel Corporation (INTC), reducing the impact, taking this result in isolation shows frankly atrocious performance. It does confirm Intel’s narrative of a massive ongoing PC inventory correction (as this statement has been echoed by AMD).
Lastly, data center revenue was $1.7B, up 42% YoY or by around $500M. While, again, credit may be where it’s due for AMD actually posting (strong) growth in the first place, it should nevertheless be noted that Intel in Q4 saw a $2B reduction in data center revenue. This means that only 25% of the revenue which Intel lost went to AMD. This puts the AMD share gain thesis in some perspective.
Q1 guidance
Prior to the earnings release, the estimates were for roughly flat sequential performance, and in fact for AMD to return to all-time high revenue by the end of the year.
However, in the wake of Intel’s report, it was clear this was too optimistic, and indeed the Q1 guide calls for a 10% revenue decline to $5.3B at the midpoint. Q1’22 revenue was $5.9B, including $0.6B Xilinx revenue.
This implies that, excluding Xilinx, revenue will drop from $5.3B in Q1'22 to $3.9B in Q1'23 (assuming flat Xilinx revenue of $1.4B from Q4 to Q1), marking a non-insignificant 27% organic revenue contraction, led yet again by a weak PC segment.
To put this in perspective, AMD was and likely still is seen by most investors as a growth company (and indeed AMD's official guidance is for over 20% multi-year annual growth). Yet here it is: AMD going forward will be posting significant YoY organic revenue declines, only partly held up by relative strength from its Xilinx merger.
Longer-term outlook
Investors could argue that, similar to Intel, the PC inventory correction is just temporary, and the roughly billion dollars in quarterly PC revenue that it has seen disappear could easily return.
Nevertheless, this won't be enough to make AMD a compelling investment for the eventual upcycle, as the same arguments made a year ago will remain valid, which is that AMD has become a mature company operating in mostly mature markets.
While there could be some further growth over time, for example in the data center, this will likely only be sufficient to grow into its existing valuation (rather than to expand its valuation).
In addition, investors will have to accept that a large part of AMD's comeback was made possible on the back of Intel's multi-year stumbles, which is a benefit that at best won't be true anymore going forward, and at worst could turn against it as Intel instead regains technology leadership.
Investor Takeaway
With a roughly 27% revenue drop looming in Q1 in the legacy AMD business, the AMD growth story is officially over, if it wasn’t already when AMD first warned of its massive revenue and earnings miss in October.
Nevertheless, it seems some or even many investors are not realizing this yet, as evidenced by the stock reaction (which went up), as well by the top comment on Seeking Alpha, which stated: “Very impressive results. AMD should head to $100 this year if not higher.”
I would argue there was nothing impressive about its results. While gaming continued to hold up reasonably, the PC space has been a train wreck since Q3, far more so than Intel. Given Intel’s resurgence in the PC space since Alder Lake, there is no evidence anymore of AMD’s ability to gain market share, as indeed Intel claimed the reverse, that it actually gained share instead. Even in the data center, AMD only captured a small minority of the revenue Intel lost.
In any case, AMD missed overly optimistic estimates for Q1 (which had obviously become untenable in the wake of Intel's report), and the estimates for the remainder of the year (as they stood going into the release) will likely also prove to have been too high. In other words, the downward revisions as a result of the trends discussed (i.e., the end of the growth story) will inflate its valuation.
As such, as has been my thesis since a year ago, the only component that has continued to prop up AMD’s results is the inorganic Xilinx contribution. Hence, given the very rich valuation, Advanced Micro Devices, Inc. investors should bail from the stock before this inorganic piece disappears in Q2, leaving a company with an ever-richer valuation as estimates need to be reduced into this downturn.
This article was written by
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Comments (223)
CCG -22.8%
DCAI -15.4%AMD +43.6% (15.8% excluding XLNX/Persando)
Client -10%
DC +63.6% (52.1% excluding XLNX/Persando)Those are decent AMD numbers even though they started under shipping, over 50% less, client CPU/GPU in Q3 which resulted in the drastic drop in Client revenue for Q3/Q4 last year. AMD is expecting Q1 to be its last under shipping quarter so there should be modest growth for Q2 and a more normalized Q3/Q4. Q1 will be the start of Intel’s pain in dealing with inventory glut as they were still over shipping as of Q4. 2022 revenue growth was mostly XLNX/Persando accretion with a decent organic growth of its traditional business.. XLNX +27.8% accretion
AMD +15.8% (traditional business)XLNX’s YoY growth is accelerating nicely since joining AMD for 2022. AMD is obviously shifting wafers and resources away from its traditional products toward XLNX, hence the CPU/GPU under shipping we’re hearing about. It’s allowing AMD to maintain its gross margin above 50% during this tough PC downturn. XLNX YoY growth prior to joining AMD:
2017 +5.8%
2018 +17.3%
2019 +12.8%
2020 -5.6%
2021 +20.4%
2022 +37.7% (merged with AMD)And no, AMD's growth story isn't finished by a long shot.
Mercury Research out today
Q4 quarter over quarter growth was 1/10th of 1% for data center
Q4 quarter over quarter 0.7% for PC.
AMD growth back to desktop and console.
I anticipate a doubling of Data Center revenue in 2023. I also expect AMD to moderate Gaming and Client production volume through first half building again into early summer for PC processor and GPU fabrication sustaining availability into q3 and q4.Nvidia I will address soon, is riding the Intel Raptor desktop and mobile ramp. I anticipate record consumer GPU mobile volume exceeding desktop 2023, and with commercial products, a record 2023 GPU production volume year.Mike Bruzzone, Camp Marketing.
" It not only trounced Intel’s Alder Lake mobile, but it’s also 90% faster than the flagship Zen 3 mobile CPU."
AI designs have to work around standing patents.
AI can write a Stephen King novel but not sell it with his name on it.
Which VR goggles are you wearing?
I would like to wear it to have money flowing to my account through AI : )
"none of the analysts pointed it out."
Now what would the reason be for that.
ZEN4 is selling now. Min 1:04:00www.youtube.com/...
Kadori and ARC no more lying. Min 44:45
P:E calculations have never even come close to AMD actual price from P:E 178 to 34 you will get no place trying to tie P:E ratio to any future real price.
www.macrotrends.net/...
i) Interest rate: 0% to 4.5%
ii) Growth: AMD was showing over 40% growth back then versus no growth (projected) in 2023.
Does this explain things to you?
Intel: Rear Mirror Missing, Can't See AMD
www.youtube.com/...
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The reason so many AMD bulls are reacting negatively to this article is it's finally dawning on them that Su has been hiding the decline in AMD's legacy businesses behind the Xilinx merger by zeroing out Xilinx's prior year revenues. That begins to end this quarter since in Q1 2022 a bit more than half of Xilinx's revenues were consolidated, and in Q2 2022 they were fully consolidated. So unless Su comes up with another merger of the size of Xilinx that she can close within the next 60 days, she's going to be reporting negative revenue growth and that has them rattled to the core.
INTC troubles will drown out anything AMD has to say.
The Intel cash cow is at the slaughter house.
Intel: Simply Finished
"Disclosure: I/we have a beneficial long position in the shares of INTC ..."
What is the return?