Investors in Advanced Micro Devices (AMD 2.37%) have enjoyed healthy gains in 2023 as shares of the chipmaker have surged 70% so far.
There's a solid reason AMD might be able to sustain its impressive rally for the rest of 2023. But before we discuss that potential catalyst, you need to know about a major red flag that could wreck this high-flying semiconductor stock's momentum.
What could halt AMD's rally?
AMD's 2023 surge has been fueled by the broader optimism in the semiconductor industry, which is getting a boost thanks to the growing adoption of artificial intelligence (AI). But the company's financial performance doesn't justify the stock's surge.
Revenue was down 9% year over year in the first quarter to $5.4 billion. Adjusted earnings fell an alarming 47% from the year-ago period to $0.60 per share.
The crash in personal computer (PC) sales was why AMD's top and bottom lines shrunk in the first quarter. The company's revenue from its client processor business fell by nearly two-thirds from the prior-year period to $739 million in the quarter.
The company's guidance for $5.3 billion in revenue in the current quarter suggests that things are about to get worse since it would translate into a 19% year-over-year decline. As a result, AMD investors could be staring at another sharp contraction in the bottom line, especially considering that the company expects its adjusted gross margin to drop to 50% from 54% in the year-ago quarter.
PC shipments crashed 29% year over year in the first quarter due to poor demand and high channel inventories. Even discounts were not enough to boost sales and bring down inventory levels.
Market research firm IDC now expects PC sales to contract 15% in 2023 to 385 million units. The firm was earlier forecasting a smaller drop of 6% to 403.5 million units, but the fading possibility of a turnaround due to economic uncertainties and inflation has led IDC to forecast a bigger drop.
Meanwhile, gaming consoles are also facing the heat of economic challenges. Newzoo estimates that the gaming console market shrunk by 4.2% in 2022, and it looks like the trend is continuing in 2023 as well.
Microsoft's Xbox hardware revenue fell 30% year over year last quarter. Given that AMD supplies semi-custom processors to both Sony and Microsoft, the weakness in the gaming console market is going to weigh on the chipmaker's gaming business, which is already bearing the brunt of weak sales of graphics cards deployed in gaming PCs.
So, the worsening conditions in the PC market could weigh on AMD's performance and keep the company from turning its fortunes around in 2023. That's something investors might not like given the stock's expensive price-to-earnings ratio of 581. However, there's one potential trick up the company's sleeve that could send the stock higher.
This fast-growing market could help the stock jump higher
The demand for graphics processing units (GPUs) capable of training AI models is booming thanks to the massive popularity of ChatGPT, OpenAI's chatbot, which was trained using thousands of GPUs from Nvidia (NVDA 6.18%). And since then, multiple companies have been lining up to buy the company's chips as they look to jump into the generative AI market.
The demand for Nvidia's data center GPUs is so strong that there is reportedly a long waiting period that extends to the end of 2023. AMD could take advantage of this shortage with its recently launched MI300 Instinct accelerators. On the company's May earnings conference call, CEO Lisa Su said that AMD is witnessing significant interest from customers in its MI300 data center accelerators, which have been developed for "both AI training and inference of large language models."
Su added that the MI300 accelerators are likely to play a role in helping return to growth in the second half of the year when their shipments begin. AMD may have arrived late to the AI GPU market, where Nvidia is currently the dominant player with a market share of 95%, but it might be able to carve its niche in this space.
AMD is aggressively challenging Nvidia's dominance. Its MI300X generative AI GPU is equipped with 192 gigabytes (GB) of memory, which is significantly higher than Nvidia's H100 GPU, which comes with 120GB of memory. Theoretically, more memory means that AMD's GPU could carry out a higher number of calculations and train AI models at a greater speed than its rivals.
If AMD's generative AI GPUs can actually deliver what the company is claiming, it could have a massive turnaround in its fortunes. That's because Su sees the global market for AI accelerators jumping fivefold over the next five years, generating $150 billion in annual revenue in 2027 as compared to $30 billion this year.
AI has already given Nvidia a tremendous boost, with the company's revenue expected to jump 64% year over year in the current quarter to $11 billion as compared to a 13% year-over-year decline seen in the first quarter.
The huge opportunity in AI GPUs means that there is space for more than one player to benefit. With AMD preparing to go after the AI chip market with powerful GPUs, investors can consider holding on to this semiconductor stock because this one catalyst could be enough to send it higher.
