AMD's (AMD 3.15%) stock rose 3% during after-hours trading on Aug. 1 after the chipmaker posted its second-quarter results. Its revenue fell 18% year over year to $5.36 billion, which exceeded analysts' estimates by $40 million, while its adjusted earnings per share (EPS) declined 45% to $0.58 and cleared the consensus forecast by a penny.
Those headline numbers might seem dismal, but Wall Street had already set a low bar for AMD and its peers to account for the cyclical slowdown of the semiconductor market. Therefore, the market was looking for signs of a cyclical bottom at AMD instead of year-over-year growth. Let's see if enough of those green shoots appeared in the second quarter -- and if they indicate it's the right time to buy AMD's stock.
Image source: AMD.
How much longer will AMD's cyclical downturn last?
As the world's second-largest producer of x86 CPUs and discrete GPUs for PCs, AMD is heavily dependent on the cyclical growth of the PC market. The market's demand for new CPUs and GPUs soared during the pandemic as consumers bought new PCs for online classes, remote work, and high-end gaming, but that growth spurt led to a tough cyclical downturn.
That's why AMD's revenue has declined year over year for two consecutive quarters as its adjusted EPS has shrunk for four consecutive quarters. That slowdown also compressed its adjusted gross and operating margins.
|
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
70% |
29% |
16% |
(9%) |
(18%) |
|
Adjusted gross margin |
54% |
50% |
51% |
50% |
50% |
|
Adjusted operating margin |
30% |
23% |
23% |
21% |
20% |
|
Adjusted EPS growth |
67% |
(8%) |
(25%) |
(47%) |
(45%) |
Data source: AMD.
But in the third quarter, AMD expects its revenue to rise nearly 2% year over year (and 6% sequentially) to $5.7 billion. It also expects its adjusted gross margin to expand year over year and sequentially to approximately 51%.
That rosier forecast, which matches Intel's (INTC +1.15%) sunnier outlook for the second half of the year, suggests its cyclical downturn is finally over. During AMD's conference call, CEO Lisa Su also predicted the PC market would "grow seasonally with more normalized inventory levels across the supply chain" in the second half.
Will AMD keep pace with Intel and Nvidia?
Much of AMD's growth over the past decade was driven by its market-share gains against Intel in the PC market. AMD's transformation into a fabless chipmaker, which outsourced the production of its top-tier chips to TSMC (TSM +0.12%), enabled it to produce smaller, denser, and more power-efficient chips than Intel. In this period, the larger chipmaker struggled with shortages, delays, and disappointing yields at its in-house foundries.
NASDAQ: AMD
Key Data Points
AMD's share of the PC CPU market doubled from 17.5% to 35% between the third quarters of 2016 and 2023, according to PassMark Software, while Intel's share shriveled from 82.5% to 62.9%. But looking ahead, it's unclear if AMD can keep growing its market share as Intel launches its new "Intel 4" node that is comparable to TSMC's 3nm-to-5nm chips. AMD insists its new Zen 4 CPUs, which are being mass-produced on TSMC's 4nm and 5nm nodes, will help it maintain its technological edge -- but that balance could shift if Intel accomplishes its goal of catching up to TSMC by 2024-2025.
AMD also hasn't fared that well in the GPU market. Its share of discrete GPUs was halved year over year from 18% to 9% in the fourth quarter of 2022, according to JPR, as Nvidia's share grew from 78% to 85%. Meanwhile, Intel's share rose from 5% to 6% as its Arc GPUs gradually chipped away at AMD's base of budget-conscious gamers. AMD is trying to offset that pressure by rolling out higher-end GPUs and expanding into the data center market with new AI-oriented Accelerated Processing Units, or APUs (which merge the CPU and GPU in a single processor package). However, Nvidia has already established a significant first-mover advantage in that growing market.
But despite that competitive pressure, AMD still expects its client computing and gaming revenues to keep rising sequentially in the second half of the year as more than 100 AMD-powered commercial PC platforms hit the market. It also expects stronger sales of Sony's PS5 and Microsoft's Xbox Series consoles -- which all use its APUs -- to lift its gaming revenue.
Lastly, AMD's embedded division, which was expanded significantly by its $50 billion acquisition of Xilinx last year, should also continue to expand as it rolls out new chips for the industrial, healthcare, automotive, and emulation markets. That growing segment, which posted a 16% year-over-year increase in revenue in the second quarter, could offset some of the near-term macro and competitive headwinds for its PC CPU and GPU businesses.
Is it the right time to buy AMD?
Analysts expect AMD's revenue and adjusted EPS to decline 3% and 19%, respectively, in 2023 before accelerating again in 2024. AMD's stock has already rallied over 80% this year in anticipation of that recovery, but its stock still isn't terribly expensive at 41 times forward earnings. Therefore, I believe AMD's strengths outweigh its weaknesses -- and the stock is worth buying right now before its cyclical downturn formally ends.
