AMD (AMD 2.37%) just had a messy third quarter 2023, but generative artificial intelligence (AI) once again stole the spotlight and sent shares of the chip designer higher. The stock has doubled since bottoming during the bear market just over a year ago.
But how much hype is really warranted for AMD? After all, this top chip stock also carries a high valuation, and there's a lot more going on under the hood than AI.
AMD talks up AI, but is really a mixed bag of emotions
AMD has been around for decades, has survived multiple economic downturns for the cyclical semiconductor industry, and come roaring back each time -- particularly in its run over the decade-plus following the great financial crisis of 2008-2009, and AMD's parting of ways with its manufacturing business GlobalFoundries. But this coming up cycle for chips is different. One standout quote from AMD CEO Lisa Su on the last earnings call regarding its new AI chip, the Instinct MI300, had investors feeling optimistic:
Based on the rapid progress we are making with our AI road map execution and purchase commitments from cloud customers, we now expect Data Center GPU revenue to be approximately $400 million in the fourth quarter [of 2023] and exceed $2 billion in 2024 as revenue ramps throughout the year. This growth would make MI300 the fastest product to ramp to $1 billion in sales in AMD history.
Don't get me wrong, I'm an AMD shareholder too, and "fastest growing chip in AMD history" sounds pretty good. But let's put it in context. Total data center revenue was $1.6 billion last quarter, flat year over year (but better than chief rival Intel's 10% year-over-year data center sales decline to $3.8 billion). The rub here is that there's a lot more to the "data center" segment than AI chips. After booming cloud computing growth the last few years, the bulk of AMD's sales (primarily from EPYC CPUs and adaptive systems-on-chip), big data center operators are reallocating budgets to generative AI GPUs.
This obviously favors Nvidia right now, which has been reporting booming data center sales (over $10.3 billion in its last reported quarter alone) as new infrastructure to support generative AI is soaring. And meanwhile, that has the bulk of AMD's data center business in decline, so AI is merely offsetting that "old" data center infrastructure weakness.
Additionally, there's a growing downturn in other pockets of the semiconductor space. Communications and industrial markets (AMD's "embedded" segment, primarily from the early 2022 acquisition of Xilinx) also fell 5% year over year after a stellar run. Gaming sales, tied to the ongoing downturn in consumer electronics spending, were also down 8%.
The lone star in Q3 then was the "client" segment, primarily CPUs for the bludgeoned PC and laptop market. Peak to trough, "client" sales went from $2.2 billion in Q2 2022 to a mere $739 million in Q1 2023 before making a gradual rebound back to $1.5 billion in Q3 2023. Until 2024's anticipated MI300 boom gets underway, it's actually just good old consumer-driven PC sales moving the needle at AMD at the moment.
Is a pretty good stock worth a very high premium?
AMD's coming ramp-up of the MI300 sounds promising. Its work to narrow the gap with Nvidia's unified hardware and software platform could begin to pay off, and AMD has other AI chips (like those used in design, emulation, and verification when engineering new chip models) that could also fuel growth next year. All of this should be a nice side car to the coming return of PC and laptop business. Profit margin recovery, especially in that beaten-down "client" segment, and overall free-cash-flow generation will be a key focus headed into the new year.
Data by YCharts.
But setting aside the at least $2 billion in expected data center GPU revenue and the MI300 top-hit next year, there are concerns with the now declining "embedded" and non-AI data center business. We don't know how much longer these downturns will last, and how deep they'll get. That's a headwind for AMD, and a drawback to being a big diversified chip company, especially after the Xilinx tie-up.
AMD stock trades for 30 times Wall Street analysts' expectations for 2024 earnings per share, and 36 times expected free cash flow. It isn't exactly a value, although if AMD is sandbagging on those AI expectations, perhaps estimates are far too low for next year. At any rate, I'm not so sure AMD is the screaming AI chip stock buy some think it is. I have a position, and I'm content to hold here and wait and see what management's initial 2024 outlook is in a few more months.
