Artificial intelligence (AI) is enjoying a resurgence of late. The potential implications illustrated by next-level chatbots like ChatGPT captured the public's imagination and sent investors scurrying to discover the next multibagger AI stock.
Among those potential beneficiaries is Advanced Micro Devices (AMD -5.44%), better known as AMD. The chipmaker is a player in the graphics processing unit (GPU) market, but in recent years has been increasingly chasing the cloud-computing and data-center markets and, by extension, AI.
When AMD reported its first-quarter results on Tuesday, market watchers expected the company to get a boost from AI. It may have, but it wasn't enough to make a noticeable bottom-line difference thanks to this challenging macroeconomic environment. Nvidia (NVDA -10.01%) is another big player in the semiconductor space and one of AMD's chief rivals. What, if anything, do AMD's results tell us about Nvidia's prospects when it reports later this month?
Let's see if the details provide any clues.
Image source: Getty Images.
Let the chips fall where they may
For its first quarter (ended April 1), AMD reported revenue of $5.35 billion, down 9% year over year. This was in stark contrast to the 16% year-over-year revenue gains it delivered in the fourth quarter, catching some investors off guard. Furthermore, the company's profitability suffered, with a loss per share of $0.09. Things were better when viewed on the basis of adjusted earnings per share (EPS), which were $0.60, down 47%.
To give context to the results, analysts' consensus estimates called for revenue of $5.3 billion and EPS of $0.56, so AMD beat on both counts. It's also worth noting the results were squarely in line with management's forecast for revenue of $5.3 billion at the midpoint.
The biggest drag on the company's results was weakness in the client segment. This business unit -- which includes CPUs, accelerated processing units (APUs), and chipsets for desktop and notebook personal computers -- saw sales plunge 65%.
At the same time, its smaller embedded segment -- which includes custom-designed processors used in a variety of industries -- grew 163%, but it simply wasn't enough to offset the decline from its client business. Furthermore, the data-center segment was flat year over year, while the gaming segment was 6% lower.
While AI is infused throughout AMD's portfolio of products, the majority of its AI chips are housed in the client and data-center segments -- so even AI wasn't enough to salvage an otherwise difficult quarter.
Management expects the pain to continue. AMD is guiding for second-quarter revenue of $5.3 billion at the midpoint of its guidance, which would represent a year-over-year decline of 19%.
What does this mean for Nvidia?
The biggest takeaway from AMD's results is that the economic environment -- fraught with high inflation and rising interest rates -- continues to weigh on the chip sector, and Nvidia probably won't get off lightly when the company reports its results on May 24.
For its fiscal 2024 first quarter (ended April 30), Nvidia forecast revenue of about $6.5 billion -- in line with analysts' consensus estimates -- which would represent a sequential increase of about $500 million. But compared to the prior-year period, it faces tough comps. It generated record revenue of $8.3 billion in the year-ago quarter, so even if it meets its forecast, that would represent a decline of about 22%.
That said, investors would benefit from taking a view that extends beyond the current quarter. Nvidia has long been the gold standard in high-end gaming processors, and its GPUs were among the first to be adopted for AI systems. Furthermore, Nvidia long ago saw the writing on the wall and developed custom hardware and software combinations (called stacks) that run the gamut from AI used in cloud computing, data centers, and across enterprise businesses.
The opportunity provided by AI is much bigger than what happened over the past three months. Ark Investment Management recently released its Big Ideas 2023 report, and the implications are clear. "If vendors were to capture 10% of the value created by their products, AI software could generate up to $14 trillion in revenue and $90 trillion in enterprise value in 2030," according to the report. As the leading provider of semiconductors used in AI, Nvidia is well-positioned to benefit from this secular trend.
For Nvidia investors, it's best to keep your eyes on the prize, buying shares and holding for years, if not decades. AMD investors would benefit from following the same advice.
