Advanced Micro Devices (AMD 4.20%) stock got a reality check after the release of the company's first-quarter 2023 results on May 2, as investors pressed the panic button and brought the chipmaker's impressive rally to a temporary halt.
Shares of AMD plunged more than 9% on the day following its earnings release. The semiconductor giant's guidance turned out to be lighter than expected thanks to the weakness in the personal computer (PC) market and a flat performance from the data center segment on account of an ongoing inventory correction at enterprise customers.
Despite the subsequent rebound in the stock price, the company's latest results and guidance suggest that AMD bears may have the upper hand, especially considering the stock's expensive valuation. Let's look at the reasons why.
NASDAQ: AMD
Key Data Points
The bearish case against AMD stock
AMD's first-quarter revenue declined 9% year over year to $5.3 billion, while adjusted earnings fell an alarming 47% from the year-ago quarter to $0.60 per share. The sharp earnings drop was driven by a year-over-year decline of 10 percentage points in AMD's operating margin to 21% last quarter, which is not surprising as the weak demand for PC chips has forced it to offer discounts to clear inventories.
And the bad news doesn't end there. AMD expects $5.3 billion in revenue in the second quarter, which is lower than Wall Street's consensus projections of $5.5 billion and points toward a 20% drop from the year-ago period's revenue of $6.6 billion. That's a significantly larger decline than what we saw in Q1. Additionally, AMD's adjusted gross margin forecast of 50% for the current quarter suggests a decline in earnings, as that's below the prior-year period's reading of 54%.
These sharp declines aren't surprising given the situation in the PC market. AMD's revenue from client processors that power laptops and desktops fell a whopping 65% year over year to $739 million. Market research firm IDC reported last month that PC shipments fell 29% year over year during the first quarter, which explains the huge drop in the segment's revenue.
AMD CEO Lisa Su said on the latest earnings conference call that the client processor business may have hit a bottom. Su expects client CPU (central processing unit) sales to start growing from the current quarter and get stronger in the second half of the year. But the guidance reflects otherwise, and a recovery may not happen any time soon, as IDC expects PC inventory levels to remain elevated even in the third quarter. A recovery is expected to happen only in 2024. So AMD's client processor business could remain under pressure.
Meanwhile, the company's data center business has also lost momentum. Revenue from this segment was flat year over year at $1.3 billion, with Su pointing out that "enterprise sales declined year over year and sequentially as end customer demand softened due to near-term macroeconomic uncertainty."
Given all these headwinds, it is easy to see why analysts are forecasting a 10% contraction in AMD's revenue in 2023 to $21 billion, while earnings per share could drop nearly 23% to $2.70 per share. But at the same time, there were some silver linings for AMD bulls on the earnings call that could help the stock regain its mojo once again.
Artificial intelligence could give bulls a reason to cheer
The growing interest in generative artificial intelligence (AI) applications could give AMD a much-needed boost. The company says that customer interest in its MI300 chips has "increased significantly." These chips, which AMD says are capable of "both AI training and inference of large language models," are going to hit the market later in the year.
AMD's entry into the generative AI market could unlock a big growth opportunity for the company. That's because generative AI applications such as chatbots, image generators, text generators, code generators, and others rely on GPUs to train the large language models they are based on. AMD's rival Nvidia has been a big beneficiary of the proliferation of generative AI, as its GPUs power some of the most popular applications in this niche.
It wouldn't be surprising to see Nvidia deliver a solid set of results later this month thanks to generative AI-driven demand, which could mitigate the PC market's weakness. As such, AMD would be doing the right thing by jumping into generative AI with the MI300, which combines a CPU and a GPU (graphics processing unit) on a single platform and is reportedly capable of training large language models such as ChatGPT in weeks instead of months.
It remains to be seen how competitive AMD's AI chip is compared to Nvidia's offerings, which are currently ruling the space. But investors would do well to keep an eye on how the MI300 performs in independent tests -- it could turn out to be a key growth driver for AMD, as each chip powering generative AI apps is reportedly worth thousands of dollars.
What should investors do?
With AMD stock trading at a stratospheric price-to-earnings multiple above 400 on a trailing 12-month basis, buying it right now looks like a risky bet considering the challenges that it is facing in the PC market, as well as the slowdown in the data center business. That's why investors should consider waiting on the sidelines for a turnaround to materialize.
Also, if this semiconductor stock dips and is available at a more attractive valuation, it could turn out to be a solid long-term pick considering the multiple catalysts that AMD is sitting on, especially in the server business, where it has a lot of room for gaining market share. So AMD bulls should wait for a better time to buy the stock, as the bears hold the upper hand right now following its latest earnings report.
