AMD Stock Is Down 50%: Is It Time to Buy?

Shares of semiconductor company Advanced Micro Devices (AMD -5.78%) peaked in late 2021 at around $160. Since then, the semiconductor industry has shifted hard from shortages to gluts. Demand for PCs has crashed, and excess inventories are further pushing down orders for AMD's central processing units (CPUs) and graphics processing units (GPUs). Server CPUs, semi-custom chips that power the major game consoles, and embedded products are bright spots, but overall AMD's revenue and profits have taken a major hit.

As of May 3, AMD stock was down just about 50% from that all-time high reached in 2021. The company's first-quarter earnings report didn't help matters. While AMD beat analyst estimates across the board, the PC chip business collapsed, and the company's outlook was far from stellar.

While it may be tempting to buy the stock at what looks like a big discount, investors need to consider the pros and cons.

What's going right for AMD

AMD's overall revenue declined by 9% year over year in Q1, or by more than twice that if you exclude the contribution from the acquisition of Xilinx. What's more, AMD guided for a revenue decline of approximately 20% in the second quarter. The company also posted a GAAP loss, along with a big decline in adjusted profit.

Not every segment is suffering from sales declines. AMD's data center segment, despite facing headwinds related to high client inventories, produced roughly flat revenue compared to the prior-year period. AMD saw strong demand from cloud customers, which was offset by lower demand from other enterprise customers.

AMD's latest generation of EPYC server chips holds a clear edge over products from rival Intel. Intel faced chronic delays getting its latest Sapphire Rapids chips out the door, allowing AMD to beat Intel to market with its Genoa series chips. Genoa featured higher core densities and vastly better performance than anything from Intel when the chips launched last November.

AMD's embedded segment, aided by the acquisition of Xilinx, is also doing well. While year-over-year numbers are skewed by the fact that the acquisition closed in the middle of Q1 last year, Xilinx appears to be putting up a strong performance as part of AMD.

Xilinx also opens the door for cross-selling of other AMD products, as CEO Lisa Su explained during the earnings call: "We have seen the beginnings of good traction with the cross-selling and that is opportunity to take both Ryzen and EPYC CPUs into the broader embedded market. I think the customers are very open to that."

What's going wrong for AMD

In a word, PCs. Global shipments of PCs tumbled by 29% year over year in Q1, according to IDC, and sales of AMD's Ryzen PC CPUs crashed even harder. On top of weak end-market demand for PCs, the PC supply chain is still overloaded with excess inventories. Sales in AMD's client segment, which is primarily CPUs, crashed 65% year over year in Q1.

In addition to a terrible PC market, AMD's latest Ryzen 7000 chips fall short in multiple ways compared to Intel's Raptor Lake chips. That's likely one reason why AMD's PC business is doing worse than Intel's, even though Intel has a higher market share.

AMD's gaming segment also suffered in the first quarter, with sales down about 6%. Within that segment, sales of semi-custom chips that power the major game consoles rose, while sales of gaming GPUs declined. AMD gave little detail on the gaming GPU business, only saying that channel sell-through improved from the previous quarter.

PC shipments will eventually stabilize, and once inventories are worked through, AMD's PC CPU sales will better reflect actual end-market demand. But even once all that happens, it's likely that annual PC shipments will settle well below pandemic-era highs. And AMD's current slate of Ryzen CPUs is not particularly competitive relative to Intel's offerings.

Valuation matters

While AMD's results right now are a mixed bag, the valuation pushes AMD stock into the "wait and see" column for me. AMD is currently valued at about $133 billion. That's about 6.5 times the average analyst estimate for 2023 sales, and roughly 32 times the estimate for 2023 adjusted earnings per share. These estimates likely assume that the PC situation improves meaningfully in the second half, which is not a guarantee.

In the PC market, AMD faces stiff competition from Intel. That will make market share gains tougher, and the company could even shed some of the gains it achieved since the first iteration of Ryzen in 2017. The PC business may not be much of a growth business at all for AMD for the time being.

Outside of PCs, AMD is doing better. However, Intel is aiming to reclaim its dominance in the data center with an aggressive roadmap. The size of AMD's advantage will likely narrow in 2024 as Intel rolls out new chips.

AMD stock isn't egregiously overpriced, but it's certainly not cheap given the headwinds facing the company. I'll be staying on the sidelines.