Shares of Advanced Micro Devices (AMD 2.26%) have been in recovery mode this year, surging nearly 70% since the start of the year. The hype around artificial intelligence (AI) has undoubtedly driven some of these gains. While AMD's presence in the AI accelerator market is limited, the company is making a big push to grow that part of the business.
Should investors jump aboard AMD stock as it surges higher? There are a few important things to know before making a decision.
1. The PC business is struggling
After a pandemic-era boom in PC sales, consumers and businesses have slammed on the brakes. Global PC shipments plunged 16.2% in 2022, according to Gartner, followed by a steeper 30% decline in the first quarter of 2023.
The drop in demand has created a double whammy for AMD and most companies that are dependent on the PC. Not only is end-market demand depressed, but there are also excess inventories of PCs and components sloshing around the supply chain. This has led buyers of AMD's PC chips to pull back even harder than consumers to reduce inventory levels to reflect the weak demand environment.
AMD's client segment, which includes PC central processing units (CPUs), suffered a 65% year-over-year decline in revenue in the first quarter. It was the worst quarter for the segment since at least 2017.
Chart by author. Data source: AMD's earnings reports.
The gaming segment fared a bit better, with revenue slumping just 6% year over year. But this segment includes not only PC graphics cards but also semi-custom chips that power the major game consoles. Semi-custom revenue was up, and AMD didn't disclose how deeply graphics card revenue declined. For reference, in rival Nvidia's most recent quarter, gaming revenue tumbled 38% year over year.
Inventory corrections will eventually be completed, and demand will eventually stabilize and bounce back to a degree. But competitively, AMD is in a worse position today than it's been in the past few years. Intel's latest Raptor Lake PC CPUs are causing headaches for AMD's Ryzen PC CPU business, and Intel's heavy investments in manufacturing should see the edge AMD has gained by using Taiwan Semiconductor Manufacturing to make its chips narrow in the coming years.
AMD can certainly go toe-to-toe with Intel, but market share gains may now be tougher to come by.
2. Data centers and embedded are doing better
Demand for servers has started to weaken this year, although the long-term picture still looks bright. AMD's data center business is holding its ground in this environment, with revenue essentially flat in the first quarter.
AMD has a clear advantage in the server CPU market. The company's latest Genoa chips -- part of its EPYC family of processors -- are performance and efficiency monsters. One reason AMD was able to build such a lead over Intel was Intel's chronic delays in getting its Sapphire Rapids server chips to market. Sapphire Rapids was delayed multiple times, finally launching in early 2023. The chips were originally planned for 2021.
Outside of server CPUs, AMD is gunning for the AI accelerator market with its latest MI300X graphics chip. While the company is far behind market leader Nvidia, AI is a multibillion-dollar opportunity for AMD if it can successfully chip away at Nvidia's dominance.
AMD's acquisition of Xilinx bought the company a thriving, high-margin embedded business that's now larger than both the data center and client businesses. While this business isn't immune from a tough economic backdrop, it's helped to diversify AMD and lower its dependence on the PC market. The embedded segment managed an operating margin of 51% in the first quarter, making it by far the most profitable segment.
Is AMD stock a buy?
Right now, AMD's performance is a mixed bag. The struggles of the PC business have led revenue to decline and adjusted profits to tumble. Total revenue dropped 9% in the first quarter, while adjusted earnings per share crashed 47%.
AMD lapped the Xilinx acquisition in the first quarter, so the company will no longer get a boost to its year-over-year growth rate. Guidance for the second quarter calls for revenue of $5.3 billion, representing a year-over-year decline of 19%. Things may start to look better in the second half if the PC market stabilizes, but that's not guaranteed.
AMD is valued at around $176 billion, or about 7.6 times the average analyst estimate for 2023 sales and nearly 40 times the estimate for adjusted earnings. Given the challenges AMD is facing, that seems like too high a price to pay.
