AMD: Double Miss On Earnings – So what? (NASDAQ:AMD)

Dilok Klaisataporn

Thesis article

Advanced Micro Devices, Inc. (NASDAQ:AMD) reported his third quarter results results Tuesday afternoon. The company missed estimates on both lines as business growth slowed more than expected. That being said, the company has achieved better than its peers, and its valuation and longer-term outlook are very healthy.

What happened?

Advanced Micro Devices released its latest quarterly results on Tuesday. The company missed estimates on both lines, despite posting healthy growth. The following image shows the stock numbers as reported by Seeking Alpha:

AMD results

Looking for Alpha

Revenue was up 29% year-over-year, although it should be noted that this metric was impacted by AMD’s takeover of Xilinx which closed early this year. Adjusted for this, revenues would have increased less, although the growth rate would still have been positive. Xilinx generated revenue of $1.01 billion in the third quarter of the previous year, while AMD’s revenue increased by $1.26 billion from a year ago.

So there was organic revenue growth of about $250 million on top of the $1.0 billion in revenue that AMD added through mergers and acquisitions. $250 million in incremental sales equates to about 5% of AMD’s adjusted M&A revenue. That’s much less compared to the revenue AMD added in previous quarters, when its relative growth rate was also much higher.

But on the other hand, AMD has further expanded its business, while its peers Intel (INTC) and Nvidia (NVDA) did less well – NVDA generated 3% revenue growth, while Intel saw sales fall 20% in the last quarter. So while Advanced Micro Devices saw its growth slow compared to a few quarters ago, it remained in an industry-leading position in terms of growth, outperforming its competitors.

AMD’s Q3 – Strengths and Weaknesses

Digging deeper into AMD’s results, there are important elements for investors. First, Advanced Micro Devices continued to perform well in the data center space, one of the most important growth markets for semiconductor companies and an area where companies can typically generate above-average margins. , which contributes to their profitability. AMD’s data center sales were up 45% year-over-year, easily outpacing Nvidia’s and Intel’s respective performance in the data center space.

AMD’s data center chips are energy efficient, which is a strong selling point in a world where energy is becoming more and more expensive. While energy efficiency was less important when energy was cheaper and money was readily available, higher energy prices and increased pressure on Alphabet (GOOG, GOOGL), Amazon (AMZN), Metaplatforms (META), and co. becoming more cost-effective means AMD’s energy-efficient chips are becoming more attractive.

This trend is likely to continue, and with AMD releasing its higher-tier Genoa chips on November 10, it’s likely that the company will continue to make gains in the data center market, I believe. Over the long term, growth in the data center market will allow more than one company to grow profitably, but with AMD well positioned to gain market share from companies such as Intel, the outlook for Company-specific growth is better than the already very healthy market. growth prospects over the next two years.

AMD was not as successful in the “customer” segment. Lower PC sales led to weaker demand for AMD chips. AMD was able to increase its average selling price in this unit thanks to the introduction of new products that improved its mix, but that wasn’t enough to offset the headwinds of declining PC sales and inventory corrections. . High inflation rates, especially in necessary goods such as food and energy, are pinching consumers’ pockets, which is why the near-term sales outlook for discretionary consumer goods such as PCs does not are not good. This isn’t an AMD-specific issue, however, and the company should be able to increase sales in this space again when the market starts to improve.

“Embedded” sales increased dramatically, but as they were almost entirely driven by the acquisition of Xilinx, the comparison with the prior year quarter is not really telling.

When it comes to margins, AMD has seen its GAAP gross margins decline over the past year from 48% to 42%. More importantly, however, the company’s adjusted/non-GAAP gross margin increased slightly to a very attractive 50%. Improved product mix was the driving force behind this, as AMD’s data center sales increased while the low-margin consumer goods business saw revenue decline.

In the short term, this trend is expected to continue, which is why AMD expects gross margins to remain very attractive going forward: the company’s fourth quarter forecast calls for an adjusted gross margin of 51%, which is even slightly higher than the already strong margin showing from the third quarter. It also suggests that the ongoing economic downturn is not causing AMD to lower its selling prices significantly, otherwise the company would not have been able to maintain, or better yet, increase its margins.

Advanced Micro Devices’ earnings also increased from the prior year period, which is not surprising as gross margins increased and the company significantly increased revenue. For investors, however, earnings per share growth is more important than company-wide earnings growth. On this front, AMD did not perform very well, as the increase in its number of shares caused by the acquisition of Xilinx unfortunately more than offset the tailwinds of higher net profits across the company. ‘company. As a result, AMD’s earnings per share fell from $0.73 to $0.67, down 8%. It’s not a disaster, but it’s not a great performance either.

Given that AMD management saw some value in the Xilinx acquisition despite the dilutive impact, things could very well improve in the future, for example due to additional synergies or due to the improvement in growth potential following the acquisition. But at least for now, the acquisition of Xilinx hasn’t generated much shareholder value, I believe.

AMD is cheap with significant growth potential

For the current year, analysts currently expect earnings per share of $3.64. This could be revised down after the Q3 shortfall (of $0.03), so assume AMD will earn $3.60 this year. This translates to an earnings multiple of 16.7 with shares trading at $60. That’s neither a high valuation in absolute terms, nor a high valuation given AMD’s long-term growth potential. Looking at how AMD’s peers are rated, it also seems inexpensive:

Chart
Data by Y-Charts

Considering a combination of expected growth and valuation, AMD appears to be by far the best choice among its peer group. Intel is trading at a comparable earnings multiple despite a sharp decline in revenue, while growthless Nvidia is trading at 2.5 times AMD’s valuation.

Advanced Micro Devices is expected to grow earnings per share by around 10% next year, which translates to an earnings multiple of around 15 in 2023. This is, again, a fairly inexpensive valuation, considering absolute terms and also considering how AMD has been valued in the past – not too long ago the company was trading at 30x net income and more. Of course, growth has slowed since then, and the law of large numbers dictates that AMD will have a much harder time delivering exceptional revenue growth quarters of over 50% in the future. But even with a much lower growth rate, AMD could be a solid choice at today’s undemanding valuation.

If AMD increases its earnings per share by only 10% per year in the future (the forecast is 15% per year, on average, until 2024), it could generate annual returns of 13% if its earnings multiple increases to 18 over the next three years – which would still be a cheap valuation, I believe. AMD has a small net cash position and therefore operates with a large balance sheetwhich gives the company considerable potential for mergers and acquisitions and/or increasing shareholder returns, for example through its $8 billion share buyback authorization.

Carry

AMD missed estimates on both lines. That being said, its growth was still very decent, especially compared to what peers Intel and Nvidia reported. At the same time, AMD has seen its margins rise even during this downturn, its position in the data center market is excellent, and its shares are trading at an undemanding valuation.

The outlook for the next two years is still attractive, I believe, thanks to market growth, market share gains, potential shareholder returns and an inexpensive valuation that could allow for some multiple expansion. AMD missed both lines, but I think it’s still the most favorable pick in its peer group.

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