AMD: Buying The Bear Blitz
Contributor since 2012 / 41761 Followers
Summary:
- Advanced Micro Devices, Inc. stock has corrected heavily and is in a bear market.
- Q2 performance was strong, driven by AI business growth.
- AMD’s balance sheet remains healthy.
- Several pending catalysts.
- Well-received AI-related deal struck.
sulcs/iStock via Getty Images
Advanced Micro Devices, Inc. (NASDAQ:AMD) stock has given up a ton of its value since peaking in March of this year at $227. On the last massive sell down, we guided our members to open buys at $135 and $125. Shares are up nicely in that short time frame, but we see more upside ahead longer-term.
Make no mistake, the chip sector, and tech more broadly, has been pressured for many weeks, but has woken back up in the last 8 sessions. After a massive run higher, we are actually still in the middle of a correction, though one would argue and likely should that we are seeing some mean reversion. Now we have little doubt that the chip sector is anxiously awaiting NVIDIA Corporation’s (NVDA) report next week, and the sector will take considerable cues from that report, the guide, and most importantly the commentary on the outlook for AI-chip related spend.
So, it is likely we see another wave lower, and if so, you should scale in. While shares are down enough from the peak to be in a bear market situation, the valuation has reset, at least compared to where it was nearly 70 points higher. And this comes as AMD continues to perform well. We think you can buy now, but we embrace scaling in as the market allows, establishing a position. With that said, the earnings performance in Q2 supports a buy on this large pullback, in our opinion. The future is bright.
Performance was strong in Q2, though sales declined as expected
The AMD Q2 earnings were overall strong. The headline results were above consensus. We think that operations continue to benefit from the AI revolution, which is only a boon to operations, even if it will take several quarters to really ramp up more from here, as competition is stiff. We are watching every chip report for signs that AI is not all it was cracked up to be (a risk), but thus far, capex from customers on AI needs continues to rise. That said, in Q2, revenue was $5.84 billion and was up 9% from last year, and surpassed estimates by $120 million. Now, we recognize that not all segments are firing. Leadership has emerged from data center and client revenue, while gaming continues to suffer, perhaps in part due to where we are in the gaming and PC demand cycle. Embedded segment revenue took a hit too.
Segments are mixed
So, AI is driving a big chunk of sales as AMD enjoyed record Data Center segment revenue of $2.8 billion. Folks, this was up 115% year-over-year primarily driven by the steep ramp of GPU shipments, and strong growth in 4th Gen CPU sales. Revenue was also up 21% sequentially, which is one of the more bullish points we must highlight. We also like the bounce back in the Client segment revenue. This revenue was $1.5 billion, up 49% year-over-year and also up 9% sequentially, primarily driven by sales of its Ryzen processors. But as we alluded to, it was not all good news. Their Gaming segment revenue was just $648 million, down 59% year-over-year and 30% sequentially. Further, the Embedded segment revenue was $861 million. This was down 41% year-over-year. Management asserted that this was due to customers that are still in the process of trying to “normalize their inventory levels.” However, one bright spot for Embedded is that revenue increased 2% sequentially.
Margins must be watched
We closely watch gross margins, and these have been under some pressure depending on the quarter, but we are seeing margin expansion right now and that is a big bullish sign. AMD’s GAAP gross margins were 49%, up 300 basis points year-over-year, and also rising from 47% in the sequential Q1. We saw a brief dip in margins in some 2023 quarters, but now we are clearly seeing progress here with this print. Adjusted gross margins also expanded, widening to 53%. This was up from the sequential quarter’s 52%, and up from 50% a year ago. While Q2 2022 was 54% for margins, we are encouraged by the present widening of margins.
Operating income rebounds
As the revenues and adjusted margins were up from last year, AMD saw an unsurprising increase in gross profit. Operating expenses remain elevated. We note that the 15% increase in adjusted operating expenses outpaced the percentage revenue gains, but was not enough to offset the strong gross margins.
In Q2, AMD’s operating income, as adjusted, rose to $1.26 billion, or an increase of 18% from $1.07 billion a year ago. Now we want to be balanced. It is noteworthy that two years ago, adjusted operating income was $1.98 billion. So while this quarter saw positive trends and metrics are moving in the right direction, it is a far cry from 2 years ago. We would prefer more focus on controlling operating expenses in an environment where sales in key segments are mixed. Any decline in AI demand could be catastrophic near-term.
That said, putting it all together, AMD’s net income rose from $948 million from a year ago to $1.13 billion. Earnings per share increased to $0.69 from $0.58 last year and beat by $0.01. EPS was also up 11% from the sequential Q1. AMD Chair and CEO Dr. Lisa Su stated in the press release:
“We delivered strong revenue and earnings growth in the second quarter driven by record Data Center segment revenue. Our AI business continued accelerating and we are well positioned to deliver strong revenue growth in the second half of the year led by demand for Instinct, EPYC, and Ryzen processors. The rapid advances in generative AI are driving demand for more computing in every market, creating significant growth opportunities as we deliver leadership AI solutions across our business.”
It was encouraging to see that the AI business is accelerating, setting AMD up for a strong H2, but we are cognizant, as we stated above, that all eyes will be on NVDA and its report. Regardless, AMD had a strong quarter and a positive outlook. The company also has a great balance sheet.
AMD still has a strong balance sheet
The AMD balance sheet is quite healthy. At the end of Q2, cash was $4.1 billion. Cash from operations was $593 million compared to $379 a year ago, though these numbers still lag Q2 2022 which was over $1 billion on this front. Free cash flow was $439 million, up from $254 million a year ago and up from the sequential Q1’s $379 million. Still, this also lags compared to $906 million two years ago. This is not a bearish take, we are just pointing out that shares have ballooned on hopes for more growth, while 2022 was a year of considerable growth and better segment performance outside the AI-involved segments. Total debt stood at $1.72 billion, so net cash is a strong $2.4 billion.
Outlook and recent acquisition news
AMD stock has corrected heavily on uncertainty for AI and a rotation that took place in late spring and early summer. We are also potentially about to hit a seasonal correction. As we look ahead, we still see ongoing weakness for PCs and client revenue. We continue to think that the data center leads the way, but we like the rebound in Client revenue. We think the Gaming and Embedded segments are in a lower trough of their cycle and would expect to see some rebound in these segments in 2025. That said, here today we view shares as a buy here, but if we get another selloff, do some more buying.
For Q3, we believe Advanced Micro Devices, Inc. will start to see performance ramp up after the Q2 print. That is our thesis here. AMD guided for revenue to be approximately $6.4-$7.0 billion, while gross margin will be around 53.5% a respectable margin.
Our view for the year on revenues is $25.5-$26.2 billion. We see revenue strength ramping up later this year and into 2025. Assuming at least a 53% margin, and even roughly comparable capex and opex, we see EPS of $3.43-$3.50 for 2024 as likely. Assuming the midpoint, AMD stock is not cheap, but is much cheaper than a few months ago.
We also think it is worthwhile to point out that the market really liked the most recent acquisition news. The company is acquiring AI infrastructure provider ZT Systems in a cash and stock deal worth about $4.9 billion. After announcing this, the stock actually added some $10 billion in market cap and has tacked on recently. The acquisition will help AMD expand its data center and AI systems capabilities, and is another step forward for AMD in its AI strategy.
Take-home
Advanced Micro Devices, Inc. stock is technically in bear territory. We have the pending catalyst of the NVDA report, and we are also coming into a seasonally weak period for markets. We also have macro forces in a US election year that could add more uncertainty. Thus, we see AMD shares as a buy here, but if you get a selloff, do some more buying.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Looking for our highest conviction trades?
Start WINNING TODAY! Grow your portfolio by embracing a blended trading and investing approach at our premier service!
We activated our Labor Day Deal ahead of other services, so you can lock in our best price in 5 years. Join Seeking Alpha’s premier service while spots remain at the 2018 founding rate! It’s available to the first 3 subscribers ONLY. Come trade and learn from the best.
Enjoy a money back guarantee if you aren’t satisfied (you will be). Start WINNING today. Get in the game!