Advanced Micro Devices (AMD 3.46%) reported some stellar first-quarter results. Revenue surged 71% year over year, helped by the acquisition of Xilinx, and adjusted earnings per share more than doubled. Sales of PC processors and graphics cards surged 33%, while server, embedded, and semi-custom chip sales soared 88%.
Equally as impressive was AMD's guidance. The company called for 69% year-over-year revenue growth in the second quarter, driven by Xilinx and growth in all its segments. For the full year, AMD expects revenue to surge by 60% to $26.3 billion.
Image source: AMD.
The PC market is cooling off
AMD's growth over the past few years has been fueled by market share gains in the PC and server chip markets, the launches of the latest generation of game consoles, and a very strong market for PCs during the pandemic. AMD's Ryzen PC chips and EPYC server chips have been winning share from Intel (INTC 5.69%), and game consoles powered by AMD semi-custom chips have been in high demand.
It was inevitable that the PC market would eventually cool down, but timing was a wildcard. There are now multiple signs indicating that demand for PCs is slowing. First, IDC reported in April that global PC unit sales declined 5.1% in the first quarter following two years of pandemic-fueled double-digit growth. Overall shipments were still well above pre-pandemic levels in the first three months of the year, but consumer sentiment has only worsened since then.
More recently, Digitimes reported on Tuesday that Intel was cutting prices on its latest Alder Lake chips for OEMs in an effort to boost sales. Tom's Hardware pointed out that some PC makers may be holding off on orders to wait for lower prices, but Digitimes' sources said PC orders for the second half were well below expectations.
This pessimism from PC makers could indicate that a steep drop in PC demand is coming this year. This is just one data point, and it doesn't really say anything about the market for components. AMD and Intel sell their chips to consumers as well as to OEMs, and many PC gamers put together their own systems.
But with inflation persistently elevated and recession fears ramping up, it's possible that demand for PC chips destined for home-built PCs will also decline. Demand for graphics cards could fall as well, although there may be enough PC gamers who held off over the past two years due to high prices to absorb any supply.
There's been no sign that server chip sales are slowing, but a recession could certainly lead enterprise customers to pull back on tech spending in general. That could cascade into a slowdown in cloud computing demand, which in turn would likely lead to cloud companies buying fewer server chips.
AMD could still win market share in both the PC and server chip markets, offsetting any industrywide declines. But Intel has been stepping up its game, and its reported price cuts certainly won't help AMD. Intel's Alder Lake processors pulled the company out of its funk, offering better performance at most price points compared to AMD's Ryzen processors. AMD is set to launch new Ryzen chips later this year, but Intel will follow suit soon after with Raptor Lake.
AMD is in a position where demand for PCs appears to be weakening and market share gains may be harder to come by given the quality of Intel's latest products. Demand for game consoles could hold up better in a recession -- playing video games at home is a lot cheaper than a night out. But it's hard to say.
NASDAQ: AMD
Key Data Points
A lot can change in a few months
AMD's first-quarter report and guidance came nearly two months ago, and its second-quarter report won't come until the end of July. AMD's guidance was based on how things looked after the end of the first quarter, and it's safe to say that things have changed since then. The odds of a recession have certainly increased; layoffs and hiring freezes among tech companies have been piling up; and inflation has been taking a toll on consumer spending.
We're coming off a two-year period where consumers and businesses snapped up PCs, and where demand for cloud infrastructure services soared. It was a great environment for AMD. What comes next probably won't be so great. Given the apparent slowdown in PC demand, I'll be surprised if AMD doesn't get a little less optimistic with its outlook when it next reports results in July.
AMD stock has already dropped around 50% since its peak last year, but any sign of slowing growth could send the stock even lower. On the flip side, if AMD manages to hold its ground and gain enough market share to offset slumping demand for PCs, the stock could be in for a recovery.
