What happened
There's little question that the hard-charging market rebound this year is largely the result of excitement about recent advancements in artificial intelligence (AI). In the wake of their worst performance since 2008, the major market indexes are decidedly in rally mode so far in 2023, driven by the potential for widespread productivity gains courtesy of generative AI.
With that as a backdrop, semiconductor specialist Nvidia (NVDA 3.46%) slumped 4.9%, enterprise software purveyor Microsoft (MSFT 2.22%) fell 2.7%, and search giant Alphabet (GOOGL 0.37%) (GOOG 0.32%) slipped 2.4%, as of 3:26 p.m. ET Wednesday.
While the downgraded debt rating for the U.S. no doubt contributed to the market's dour mood today, the quarterly financial results for another AI-centric company weren't as robust as some investors had hoped, helping fuel the pessimism.
Image source: Getty Images.
So what
Advanced Micro Devices (AMD 3.04%) (also called AMD) reported its second-quarter results after the market close on Tuesday, and while the results were largely in line with expectations, some investors had hoped for more. The company generated revenue of $5.4 billion, down 18% year over year, and flat sequentially. This resulted in non-GAAP (adjusted) earnings per share (EPS) of $0.58, down 45%.
To put this in context, analysts' consensus estimates were calling for revenue of $5.3 billion and EPS of $0.57, so the results edged past Wall Street's expectations.
More eye-catching, however, was AMD's outlook, which left much to be desired. For the third quarter, management is guiding for revenue of $5.7 billion, up about 2% year over year and flat sequentially. Given the company's reliance on the gaming and consumer computing markets, the results were hardly surprising. Sales of graphics cards used by gamers have been in free fall for more than a year and while the market is expected to rebound in the back half of the year, the recovery hasn't yet materialized.
AMD's forecast stands in stark contrast to Nvidia, which reported the results of its fiscal 2024 first quarter (ended April 30) back in May. Revenue of $7.2 billion declined 13% year over year, while adjusted EPS of $1.09 fell 20%. While the results themselves weren't much to write home about, the market was mesmerized by Nvidia's outlook.
For the second quarter, management said it expected revenue to grow 64% year over year and 53% sequentially, driven by strong and accelerating demand for its cutting-edge processors used for AI.
Given the high-profile boom for all things AI, investors had hoped AMD would issue robust guidance since it competes with Nvidia in the data center and AI chip markets, but that simply wasn't the case.
Now what
It's quite clear that AI has gone viral this year. Investors have been scooping up shares of anything AI-related with reckless and wild abandon. AMD's results were likely a wake-up call that not all AI stocks are created equal, and there will be a wide range of outcomes even for those businesses that adopt these cutting-edge algorithms.
Yet, today's wide-ranging sell-off also seems to miss the forest for the trees:
- Nvidia has been keenly focused on developing semiconductor and software stacks designed to make the most of AI, while simultaneously speeding data around the data center ether. The company has established itself as the gold standard for AI processing.
- Microsoft has long been a proponent of AI and was quick to recognize the opportunity, as evidenced by its $13 billion investment in ChatGPT creator OpenAI. The company is working to integrate the latest AI advancements across its vast software empire.
- Alphabet's Google is also a pioneer in AI technology, creating the Google Brain neural network back in 2011 to develop advanced machine learning systems before AI was all the rage. The company has long used AI to improve its products and processes and is doing the same with generative AI.
Each of these companies is an industry leader in their own respect and is well positioned to profit from the AI revolution. It's also important to remember that the adoption of AI is expected to take place over the course of a decade, so there will be peaks and valleys in the results of even the most advanced AI companies.
From a valuation standpoint, Alphabet is the cheapest of the three, selling for just shy of 5 times next year's sales, while Microsoft and Nvidia are selling for multiples of 9 and 19, respectively. These valuations might deter risk-averse or value investors, so they won't be for everyone.
That said, for those with a decade or more to let the AI revolution play out, it's best to relax, sit back, and enjoy the ride.
