Wall Street looks past AMD's light guide, leading us to make a price target change

Published Tue, Aug 1 20238:10 PM EDT

Club name Advanced Micro Devices (AMD) delivered better-than-expected second-quarter results after the closing bell Tuesday, leading us to make a price target change. Revenue fell 18% year over year to $5.36 billion but outpaced the Street's expectation of $5.31 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share plunged 45% on an annual basis to 58 cents. However, EPS edged out the 57-cent forecast. AMD YTD mountain Advanced Micro Devices YTD performance Bottom line It was a better-than-feared quarter from AMD, with sequential growth dynamics and management commentary giving us confidence that the company is well-positioned to see business momentum rebound into 2024. Wall Street seems to think so as well, bidding up the chipmaker's stock in after-hours trading by more than 2%. While guidance was a tad light a the midpoint, the market is giving AMD a pass — looking past the third quarter to the expected MI300 graphics processing unit (GPU) series launch and production ramp in the fourth quarter. The MI300A is designed to address High-Performance Computing (HPC) and AI workload needs, while the MI300X is designed specifically for generative AI applications. On the call, management said these chips are on track for that Q4 rollout. The timing of this launch has been in question as analysts work to determine when exactly AMD will see the financial benefits of these chips begin to materialize. Management also said customer interest in these MI300 chips is "very high" — and in terms of AI software offerings, the team is "receiving positive feedback on the improvements and the new capabilities of [AMD's] latest software stack from our AI customers and ecosystem partners." AMD's artificial Intelligence software offerings have lagged in comparison to fellow Club holding Nvidia (NVDA). While we don't think Nvidia is at risk of losing its leadership positions in hardware or software, we're pleased to hear that chip customers are desperate for some alternative to Nvidia given how tight supplies are. The data center end market remains mixed, according to the company, as a result of ongoing optimization efforts. However, the team noted that "AI deployments are expanding." That's why the MI300 timing is so crucial. In the longer term, the team said, "AI represents a multibillion-dollar growth opportunity for AMD across cloud, edge, and increasingly diverse number of intelligent endpoints." Outside of the Data Center, Tuesday's results also confirmed that the worst of the PC inventory glut is in the rearview. Client revenues are still nowhere near where they were a year ago, but sales were up 35% in Q2 versus the first quarter. Management expects further growth in the back half of the year due to "more normalized inventory levels across the supply chain." This expected rebound in Client segment revenue should also help gross margins re-expand heading into 2024. We're maintaining our 2 rating for the time being given that we have several months to go before the MI300 production ramp — with the financial benefits not coming until next year. We are, however, raising our price target to $135 per share from $120, reflecting a valuation of about 32 times 2024 earnings estimates. The stock finished the regular session at $117.60. So, our PT bump represents nearly 15% upside to Tuesday's close. Companywide Q2 results Data center revenues in Q2 declined to $1.32 billion versus the year-ago period and fell short of estimates, reflecting soft enterprise demand and elevated inventory levels at some cloud customers. Operating income dropped nearly 69% from the prior year. On the positive side, management said in the earnings release that MI300A and MI300X GPUs are "sampling to leading HPC, cloud, and AI customers." Client sales remain under pressure, down significantly versus the year-ago period's $2.15 billion. The unit recorded a Q2 loss compared to last year's $676 million profit. However, sales were up 35% sequentially as "PC market conditions improved," the company said. The personal computer market has been dealing with a major inventory glut in recent quarters, with AMD shipping product well below consumption levels to get to a more balanced supply and demand environment. We're glad to see the worst appears to be behind us — and importantly, management said the segment should return to profitability in the third quarter. Gaming revenue was down annually to $1.58 billion as growth in semi-custom chips — the kinds used in PlayStation and Xbox gaming consoles — was more than offset by a decline in gaming graphics revenue. Operating income, however, rose 20% from a year-ago to $225 million. Embedded revenues of $1.46 billion were up nicely versus the year-ago period, with management calling out "strength in the Industrial, Vision and Healthcare, Automotive and Test and Emulation markets." While the unit's revenue number was just shy of estimates, operating income jumped 18% to $757 million. Guidance AMD provided an outlook for the third quarter of 2023 that was slightly below expectations. Management expects Q3 revenue to be approximately $5.7 billion, give or take $300 million. That's below the $5.8 billion expected by the Street at the midpoint but does bracket the expectations. Adjusted gross margin is expected to be about 51%, roughly in line with expectations. As noted, we think the light top-line guide is being forgiven as investors look past Q3 to that MI300 series ramp, which will allow AMD to directly benefit from the surge in demand for AI accelerators. It's an addressable market opportunity that management thinks will "reach over $150 billion by 2027." (Jim Cramer's Charitable Trust is long AMD, NVDA. 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. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

AMD Chair and CEO Lisa Su speaks at the AMD Keynote address during the Consumer Electronics Show (CES) on January 4, 2023 in Las Vegas, Nevada.

Robyn Beck | Afp | Getty Images

Club name Advanced Micro Devices (AMD) delivered better-than-expected second-quarter results after the closing bell Tuesday, leading us to make a price target change.