Advanced Micro Devices (AMD) marginally beat estimates for first-quarter revenue and earnings. Revenue rose by 2% to $5.5bn. Growth of 80% and 85% for the Data Center and Client (personal computing) segments only just offset declines of over 45% in both its Gaming and Embedded processors segments.
Underlying operating profit was broadly flat at $1.1bn. Free cash flow improved from $328mn to $379mn. AMD finished the quarter with net cash of $3.6bn.
Expenditure on share buybacks fell from $241mn to $4mn.
Second-quarter revenue is expected to land between $5.4bn and $6.0bn, which at the mid-point would be growth of 6%.
The shares were down 6.7% on the morning following the announcement.
Our view
The market’s been somewhat disappointed with AMD’s failure to convert strong demand for its artificial intelligence (AI) focussed products, into top and bottom line growth.
The microchip designer offers a comprehensive range of microprocessors and graphics cards, and is one of the few players with the technology capable of powering the latest advances in artificial intelligence. That’s seen huge growth from its Data Center division, which has now become the company’s largest segment by revenue.
There’s a massive opportunity here with big tech names such as Meta, Microsoft and Google owner Alphabet all aggressively increasing their multi-billion dollar budgets for AI infrastructure. AMD has a long way to go if it’s to unseat rival NVIDIA’s dominance in this space, but we think the market is certainly big enough for two.
In terms of raw processing power it seems to be at least keeping pace, and long lead times across the industry should play into its hands. However, as AMD outsources its manufacturing, supply chain issues are also putting a ceiling on its own growth. How it handles this dynamic going forward is an area we’ll be monitoring closely.
Beyond Data Center, AMD’s broad offering gives it an opportunity to integrate technology across the technology stack, which could drive growth in other product categories. Sales of its multi-purpose Ryzon Pro 8000 series chips for desktop computers are doing very well and currently power over 100 AI driven applications direct to business devices.
However there are some ongoing headwinds. Weak sales of AMD’s gaming chips are detracting from the strong growth seen elsewhere and with no major console releases on the immediate horizon, this may remain the case for some time. There’s also weak demand from some customers in the Embedded segment like automobile manufacturers.
The pace of innovation in the industry is high and AMD is ploughing some $1.5bn per quarter into research & development. The strong balance sheet means it can afford to do this and stomach fluctuations in demand, but for now payouts to shareholders are unlikely to be a priority.
AMD’s valuation sits at the top of the peer group. One might expect that price tag to be backed up by market leading growth, but that’s not currently the case. That may change in future periods, particularly as Data Center sales become a greater part of the sales mix. But that’s an unknown quantity and at this point in time the valuation would appear particularly vulnerable to disappointments.
AMD key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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