AMD delivers a Q4 beat amid industry headwinds, validating the Club investment case

Published Tue, Jan 31 20238:30 PM ESTUpdated Wed, Mar 8 20232:09 PM EST

Advanced Micro Devices (AMD) reported a fourth-quarter earnings beat Tuesday, despite ongoing weakness in the PC market, demonstrating the semiconductor firm has the wherewithal to continue to grow and nab market share. Revenue jumped 16% year-over-year, to $5.599 billion, beating analysts' expectations for $5.5 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) fell 25% on annual basis, to 69 cents a share, slightly ahead of the 67 cents per share forecasted by analysts. With its fourth-quarter results, Club holding AMD achieved record annual revenue for 2022 of $23.60 billion, with earnings-per-share $3.50 apiece, helped by the integration of semiconductor company Xilinx. The $35 billion price tag for that acquisition , first announced in Oct. 2020, was arguably too expensive. But the deal was ultimately necessary for AMD, as it helped it expand its data center business, boost margins, and further diversify away from PCs. Shares of this chipmaker are up slightly after-hours, building on today's move of nearly 4% and 16% gain for the year. Bottom line Despite facing industry-wide headwinds, including a chip glut and soft PC demand, AMD managed to outperform low expectations. More importantly, it appears AMD is drawing closer to the bottom of the cycle in its PC business, known as its client unit, a key inflection point that could signal the end of the earnings cuts that derailed its growth story last year. But as one point of pain appears to be nearing its end, a new one could be emerging. The company's management on Tuesday flagged that some of its cloud customers are digesting inventory right now, meaning they're working through what they currently own, slowing down new orders. We'll monitor cloud spending over the next few months, but its unlikely that AMD's cloud business, or data center unit, will undergo a similar inventory correction to that of the PC division, which experienced a significant pull-forward in demand from the Covid-19 pandemic. This digestion sounds more temporary in nature, and management sounded quite bullish about the second half of 2023 based on conversations with customers. That indicates the company expects to ramp up production as demand accelerates. With AMD continuing to gain market share in its cloud operations and its embedded franchise — which sells processors that are lower in complexity to end markets like the communications, industrials, health care, automotive and aerospace sectors — the long-term drivers of this growth story remain intact. This quarter and forward guidance were far better than the dismal quarter competitor Intel reported last week — with AMD continuing to dominate a market Intel once owned. We're keeping a 2 rating on the stock , meaning we would wait for a pullback before buying, given the stock's roughly 16% rise year-to-date. However, we're lowering our price target to $100 per share from $130 to reflect lower market multiples and some of the downward revisions incurred in recent months . Q4 segment results Data center revenues increased 42% but were a little softer than what analysts had forecasted. Still, AMD saw great demand in the cloud, especially from North American so-called hyperscalers, or heavy cloud users, who are moving more of their workloads to AMD processors. Client was a clear source of weakness in the quarter as revenues were roughly cut in half and profits plunged due to the ongoing inventory correction in the PC market. The good news is that this PC nightmare may soon be over, with CEO Lisa Su predicting on the earnings conference call Tuesday that the first quarter of 2023 should mark the bottom for the business, with growth thereafter. We'll have to see it to believe it, but this is the key piece of detail we have been waiting for, given that the freefall of PC sales has been the largest driver of earnings cuts. Gaming revenue fell 7% as lower gaming graphics were more than offset by higher semi-custom chips that sell into video game consoles. Gaming was a large source of the upside this quarter, but we think it's unlikely that the market will give AMD much credit for it given the late stage of the video game console cycle. AMD makes custom chips that go into the latest versions of Xbox and Playstations. Both launched in 2020 and saw tremendous demand for a few years already, so this console cycle has already peaked. Embedded revenues were up significantly year-over-year, but that's purely a function of adding in the Xilinx business. It's important to see this business continue to grow revenues because it generates higher margins relative to AMD's other segments. Outlook AMD provided an outlook for the first quarter of 2023 and while it was slightly below analysts' forecasts, it was still better than Wall Street's worst fears — particularly in light of the disastrous guidance Intel provided last week . AMD expects first-quarter revenues to be approximately $5.3 billion, give or take $300 million, compared to consensus estimates of about $5.5 billion. This figure represents a drop of about 10% year-on-year, due to declines in the PC and gaming units, partially offset by growth in the embedded and data center divisions. Sequentially, embedded revenues are expected to increase, providing some upside, while gaming and PC revenues are expected to decline, consistent with seasonality. The data center business will have to be closely monitored because revenues are expected to decline as some cloud customers work through elevated levels of inventory. No specific financial guidance was provided for the full year of 2023, but management expects the data center and embedded segments to grow year-over-year. AMD expects operating margins to be about 50% in the first quarter of 2023. The slight decline in margins from the fourth quarter of 2022 is mostly due to product mix, with cloud revenues expected to be lower sequentially. That's a slight disappointment, but the margin progression looks promising as the business moves through the year. AMD expects flattish margins in the first half, followed by expansion in the second half — a function of growth in the higher margin cloud and embedded segments, as well as some normalization of the PC business. (Jim Cramer's Charitable Trust is long AMD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Lisa Su, president and chief executive officer of Advanced Micro Devices Inc. (AMD).

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