AMD Stock: Bear vs. Bull

Advanced Micro Devices' (AMD 1.36%) stock price rose 4% in after-hours trading on Tuesday, Nov. 1, following its third-quarter earnings report. The chipmaker's revenue increased 29% year over year to $5.57 billion, which missed analysts' estimates by $80 million. Its adjusted net income grew 23% to $1.10 billion, or $0.67 per share, which was just shy of the consensus forecast by $0.03.

AMD's earnings miss wasn't surprising, since it already partly revealed those growth rates in its preliminary earnings report on Oct. 6. Let's weigh the bear and bull cases for AMD to see if this semiconductor stock is still worth buying.

Image source: AMD.

What the bears saw in AMD's Q3 report

The bears will point out that AMD's year-over-year growth rates were inflated by its acquisition of Xilinx this February. On a sequential basis, AMD's revenue rose 11% in the second quarter and declined 15% in Q3, and it expects roughly flat growth in the fourth quarter. As this table illustrates, AMD's sequential slowdown was caused by the weakness of its client segment, which sells its Ryzen CPUs for desktops and notebooks; and its gaming segment, which sells its Radeon GPUs for PCs and custom APUs for gaming consoles. Both businesses were hit hard by declining sales of PCs in a post-pandemic world.

Data source: AMD. QOQ = Quarter over quarter. YOY = Year over year.

The embedded segment's revenue surged year over year, thanks to Xilinx, but only grew slightly on a sequential basis. The data center business, which sells its Epyc CPUs and high-end GPUs for servers, continues to grow, but it can't offset the ongoing slowdown of the PC market. IDC expects global shipments of personal computing devices (PCs and tablets) to drop 10.8% this year, dip another 2.3% in 2023, and finally recover (but remain below pre-pandemic levels) in 2024.

AMD expects its revenue to rise about 43% to $23.5 billion this year, but analysts anticipate less than 10% growth in 2023 as it grapples with slower PC sales and laps its acquisition of Xilinx. Its adjusted earnings are expected to increase 29% this year and grow another 8% in 2023.

What the bulls saw in AMD's Q3 report

The bulls will note that even though AMD's revenue growth is cooling off, it still expects its adjusted gross margin to expand from 48% in 2021 to about 52% in 2022 as it generates a lower percentage of its revenue from the lower-margin client and gaming divisions. They'll also point out that while AMD's total adjusted operating margin fell sequentially and year over year to 23% in the third quarter, its data center and embedded segments' operating margins still improved year over year:

Data source: AMD. Non-GAAP basis.

AMD also generates much higher operating margins than its rival, Intel (INTC 0.61%), which saw its adjusted operating margin drop 21 percentage points year over year to 11% in its latest quarter. AMD generates a higher operating margin than Intel (even though it sells cheaper chips and has a lower gross margin) because it outsources its manufacturing to third-party contract chipmakers like Taiwan Semiconductor Manufacturing (TSM 1.60%). Intel manufactures most of its chips at its own foundries.

AMD is also growing at much faster clip than Intel, which expects its revenue to drop 19%-20% (14%-16% on an adjusted basis) this year as its adjusted EPS tumbles 64%. AMD's decision to outsource its production to TSMC also enabled it to pull ahead of Intel in the "process race" to manufacture smaller and denser chips -- and that technological leap has driven its market-share gains against Intel over the past few years.

Simply put, AMD and Intel both face cyclical headwinds as the PC market cools off. But when that cyclical downturn finally ends, AMD could be better positioned for a quick comeback than Intel, which continues to pour tens of billions of dollars into technological upgrades to catch up to TSMC. AMD and Intel both trade at about 15 times forward earnings. That low valuation should limit AMD's downside potential, but Intel arguably deserves an even lower valuation in light of its latest challenges.

Which argument makes more sense?

I believe the bullish case for AMD makes more sense than the bearish case at these levels. AMD's growth will decelerate significantly next year, but it doesn't face any of the existential challenges that are plaguing Intel. The latter is also on its third CEO in just over four years, while AMD has been helmed by a visionary engineer and CEO -- Dr. Lisa Su -- over the past eight years as it reinvented its CPU and GPU businesses. AMD might not be the best semiconductor stock to buy right now, since it's heavily exposed to the sluggish PC market, but its long-term prospects look bright and its stock is dirt cheap.