Advanced Micro Devices (AMD 1.78%) reported impressive financial performance in the fourth quarter (ending Dec. 31), with both revenues and earnings surpassing analysts' estimates. However, a slowdown in PC and gaming segments seems to be adversely affecting investor sentiment.
With analysts expecting a recession in 2023, these industry-wide issues may persist for a few more quarters -- a headwind that can be detrimental to AMD's near-term financial performance.
Yet, there are still many factors playing in favor of this semiconductor giant. Let's look at them to assess whether AMD is an attractive stock to buy in early 2023.
The data center segment is a long-term growth opportunity
AMD's fourth-quarter data center revenues soared by 42% year over year to $1.7 billion, thanks to the solid adoption of its EPYC server processors (CPUs) in cloud computing and high-performance computing. This is impressive, considering that all major cloud players, such as Amazon, Microsoft, and Alphabet, have warned of weakening demand for their cloud services due to tightening corporate budgets and increasing corporate focus on cost optimization.
However, being superior in terms of performance and energy efficiency compared to the competition, hyperscalers increasingly use EPYC processors in high-performance computing. With the company powering 101 of the world's 500 fastest supercomputers, the company is well poised to capture a significant share of the supercomputer market (estimated to be worth $21 billion in 2026).
Besides CPUs, AMD is making its presence felt in the data center GPU space with its AMD Instinct™ MI Series accelerators. These GPUs are focused on improving the performance and energy efficiency of artificial intelligence applications in cloud data centers.
The company is also gearing up to launch the next-generation MI300 accelerator. This chip integrates a CPU, GPU, and memory and provides even higher performance and efficiency for large-language model artificial intelligence applications (e.g., ChatGPT). The $1.9 billion acquisition of Pensando Systems has further added a high-performance data processing unit to AMD's data center portfolio.
The Xilinx acquisition has strengthened AMD's embedded business
AMD completed the $50 billion acquisition of high-performance and adaptive computing leader Xilinx in February 2022. Adaptive computing technology allows for devices to be reprogrammed per users' real-time needs. Since the hardware can be changed and optimized as per requirements after manufacturing, it helps shorten the upgrade cycle -- a major plus in areas such as aerospace, automotive, artificial intelligence, 5G network infrastructure, and cloud computing.
Thanks to the success of the deal, AMD's embedded segment reported $1.4 billion in revenues in the fourth quarter, up from $100 million in the same quarter of the prior year.
Strong balance sheet
AMD also has a strong balance sheet, with $5.9 billion cash and only $2.9 billion in debt. With cash exceeding debt, the company will not need to depend on raising additional high-interest debt for funding its operations or growth initiatives in the near future.
AMD stock is a buy
Although the slowdown in AMD's client business poses challenges to its near-term performance, strength in data center and embedded segments may help offset much of the negative impact. Additionally, the Federal Reserve's dovish stance seems to be highlighting the possibility that the central bank might end the interest rate hikes soon. This has helped improve overall investment sentiment for growth stocks, including AMD.
AMD has returned $3.7 billion to shareholders through share repurchases in 2022. With robust financials, strength in the rapidly growing data center market, and possible stabilization in PC and gaming markets, AMD can emerge as a winning pick over the next 12 months.
