Is AMD Stock a Buy Now?

Advanced Micro Devices' (AMD 1.36%) stock price dropped 6% during after-hours trading on May 2 following its first-quarter report. The chipmaker's revenue fell 9% year over year to $5.35 billion but exceeded analysts' estimates by $40 million. Its adjusted net income dropped 39% to $970 million, or $0.60 per share, which also topped the consensus forecast by four cents.

AMD cleared Wall Street's low bar, which had been set to account for the PC market's post-pandemic slowdown, but the market didn't seem convinced that it had reached its cyclical trough yet. Nevertheless, AMD's stock now trades nearly 50% below its all-time high from November 2021 -- so could it actually be a contrarian buy for patient investors?

AMD CEO Lisa Su speaks at a recent company conference. Image source: AMD.

What happened to AMD over the past year?

AMD restructured its business units in the second quarter of 2022 following its $49 billion acquisition of the programmable chipmaker Xilinx last February. Those new segments also provided clearer quarterly numbers for its gaming chips (discrete GPUs for PCs and custom APUs for consoles), client computing chips (x86 CPUs for PCs), and Epyc data center chips.

AMD's four new segments include gaming chips (29% of its 2022 revenue), client computing chips (26%), data center chips (26%), and embedded chips (19%). The embedded segment primarily houses Xilinx's chips. But even with the inorganic boost from Xilinx, AMD's growth decelerated significantly over the past year as its gross and operating margins declined.

Data source: AMD.

AMD's gaming and client computing growth decelerated as the market's demand for new PCs and gaming consoles cooled off in a post-pandemic world. The macro headwinds also caused large companies to delay their big data center upgrades.

In the first quarter, AMD's gaming revenue dipped 6% year over year, its client computing revenue dropped 65%, and its data center revenue stayed nearly flat. But its embedded revenue -- which still included Xilinx's inorganic gains -- surged 163%. AMD's weaknesses clearly offset its strengths, and CEO Lisa Su warned that the chipmaker was still dealing with a "mixed demand environment" during the conference call.

What will happen throughout the rest of 2023?

That slowdown will worsen in the second quarter as it fully laps its acquisition of Xilinx. AMD expects its revenue to drop 15% to 24% year over year (and stay "flattish" sequentially) in the second quarter, but it also believes its adjusted gross margin will hold steady at "approximately 50%," which suggests it's maintaining its pricing power in this difficult market.

By comparison, AMD's larger rival, Intel, ended the first quarter with a much lower adjusted gross margin of 38.4%. But unlike AMD, which outsources its manufacturing to third-party foundries like Taiwan Semiconductor Manufacturing, Intel still produces most of its chips at its own first-party foundries.

Su also expects AMD to grow "in the second half of the year" as the PC market stabilizes, it ramps up its sales of MI300 accelerator chips for the high-performance computing and AI markets, and more customers adopt its next-gen Zen 4 chips.

AMD hasn't reached the trough of its cyclical decline yet, but analysts expect its revenue to gradually stabilize in the second half and stay roughly flat for the full year. Meanwhile, Intel's revenue is expected to drop 19% this year as it experiences a tougher slowdown than AMD. For the full year, analysts expect AMD's adjusted EPS to slide 14%. However, Intel's adjusted EPS is expected to plummet 76% this year as it ramps up its spending on its foundries to challenge TSMC.

But in 2024, analysts expect AMD's revenue and adjusted EPS to rise 17% and 43%, respectively, as its cyclical slowdown ends. We should take those estimates with a grain of salt, but Su assured investors that AMD still has "significant growth opportunities ahead" as it expands its data center and embedded chip divisions to capitalize on the growing AI market.

It's still reasonably valued relative to its peers

At $84, AMD trades at 28 times this year's adjusted earnings. Intel, which is growing slower and faces more near-term headwinds, still trades at 66 times forward earnings. Nvidia is growing at a slightly faster rate than AMD, but it looks significantly pricier at 60 times forward earnings. In other words, AMD isn't exactly cheap yet -- but it looks reasonably valued relative to its closest peers and its longer-term growth rates.

I believe AMD is worth nibbling on at these levels since it remains well ahead of Intel (thanks to TSMC) with cheaper and more advanced chips, and it continues to keep pace with Nvidia in the gaming market with cheaper discrete GPUs and custom APUs for consoles. AMD's upside might remain limited until investors are convinced the storm has fully passed, but I believe it's still a great long-term play for patient investors who can tune out all the near-term noise.