AMD Regains Its Footing With Solid Q2 Report
Contributor since 2011 / 35593 Followers
Summary:
- Advanced Micro Devices, Inc. reported solid Q2 beats for its top and bottom lines on Tuesday.
- The company was guided to strong revenue growth for Q3 that was more than analysts were looking for.
- Even with shares dropping considerably from their highs, the valuation here isn’t entirely appetizing just yet.
Wicki58
While the last couple of years have seen dramatic gains in many semiconductor stocks, some recent months haven’t been as kind to shareholders. One such name is Advanced Micro Devices, Inc. (NASDAQ:AMD), which has seen shares drop nearly 40% from their all-time high in March. On Tuesday afternoon, the company reported its Q2 2024 results and the decent numbers should help this name find a more solid foundation.
Previous coverage on the stock:
With the surge in shares on hopes that an artificial intelligence (“AI”) boom would lead to massive revenue growth, I had been a little skeptical surrounding AMD for some time. Back in January, I detailed how the company got a needed reality check, as somewhat weak guidance yet again was set to put future revenue expectations at a more realistic place.
While AMD experienced a bit of a revenue growth speed bump in 2023, the leader in the space NVIDIA Corporation (NVDA) had seen explosive sales growth. As I mentioned above, AMD shares have fallen considerably from their early 2024 high, and they went into Tuesday’s report down about 17% from my prior article, despite a slightly more than 10% gain for the S&P 500.
The Q2 report:
AMD reported Q2 revenues of $5.835 billion. This number was up nearly 8.9% over the prior year period. This was a solid acceleration from the low-single digit growth seen back in Q1 of this year, but the Q2 print faced a much easier comparison from its 2023 counterpart. The good news here is that AMD came in solidly ahead of the Street, which was looking for less than 7% growth, or roughly $5.72 billion on the top line.
The star of the show here was the Data Center segment, which showed record revenues and grew 115% year over year primarily thanks to the steep ramp of Instinct GPU shipments. Client segment revenues also grew by nearly 50% to aid the top line. Gaming revenues declined by nearly 60%, primarily due to a decline in semi-custom revenue, while Embedded segment revenues were down over 40% as customers continued to manage their inventories carefully.
As AMD has seen revenues bounce back a bit, gross margins have also shown solid improvement. Non-GAAP gross margins were up three percentage points year over year, so despite operating expenses rising by the mid-teens, adjusted operating income saw roughly 18% growth over Q2 2023. The company was able to show almost 20% non-GAAP EPS growth to $0.69 per share, which beat the street by a penny.
When it comes to guidance, AMD delivered a nice surprise for the bulls. For the third quarter of 2024, AMD expects revenue to be approximately $6.7 billion, plus or minus $300 million. This is roughly 16% year-over-year growth, or about two percentage points more than the street was looking for with its average Q3 revenue estimate of $6.61 billion.
The healthy balance sheet:
When I started covering AMD several years back, the company was reporting large losses, burning through cash, and had a sizable net debt position. Now that management is delivering some decent profits, solid free cash flow is being delivered. Through the first half of this year, AMD generated $818 million of free cash flow, up from $582 million in the six-month period for 2023. Inventories remain a little higher than I’d like to see at this point, but with revenue growth forecast to accelerate in the coming quarters, hopefully, those numbers will improve a little over time.
AMD finished Q2 with over $5.3 billion of cash and short-term investments on its balance sheet, against just over $1.7 billion of debt. During Q2, the company paid back $750 million worth of borrowings, while also being able to spend $352 million on its share buyback program. With earnings expected to grow in the coming years, the repurchase plan hopefully can start to get the share count down again, as it soared quite considerably after the all-stock acquisition of Xilinx.
Looking at the valuation here:
AMD shares have dropped considerably from their highs, which has made the valuation look a bit more reasonable. AMD went into earnings trading at roughly 25.2 times its expected calendar 2025 earnings per share, down from over 41.5 times back in March, while competitor Intel Corporation (INTC) goes for less than 15.6 times. Intel is expected to show more earnings per share growth next year on a percentage basis, but that’s only because earnings have been significantly depressed recently as the chip giant looks to get its growth story back on track. AMD is also expected to show more than double the revenue growth percentage that Intel is in 2025.
When we look at AMD, the situation is quite different. Nvidia stock goes for about 27.8 times its January 2026 fiscal year earnings. Nvidia is expected to show about a third more revenue growth (in percentage terms) than AMD, but AMD is expected to show a higher earnings growth rate. Of course, Nvidia has become the clear revenue leader in this space in recent quarters. Its massive sales and earnings growth has made its growth rates moving forward come down quite significantly as it faces the law of large numbers.
Final thoughts/recommendation:
AMD announced solid Q2 results on Tuesday, which should allow the stock to regain some of its lost footing. The company announced decent top and bottom-line beats, as Data Center revenues soared, with Q3 guidance also coming in nicely ahead of expectations. AMD revenue growth is expected to accelerate over the coming quarters, which hopefully will also lead to a nice increase in the bottom line and cash flow production.
For now, I am going to maintain a hold rating on AMD shares. I like the Advanced Micro Devices, Inc. story here, but I’d like to see the valuation a little closer to the Intel/Nvidia average. As we approach the potential start of Fed interest rate cuts, there’s been a rotation away from some mega-cap and chip names like AMD, which could limit potential upside in the near term. I’d like to see the name get another good quarter under its belt and some more of this market rotation out of the way before upgrading to buy.
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