On Tuesday evening, long-time Sarge name Advanced Micro Devices (AMD) released the firm's third quarter financial results after having warned/pre-announced early in October. The numbers reported were therefore only mildly disappointing as markets absorbed what was a shock to the stock price back on October 6th.
For the three month period ended September 24th, AMD posted adjusted EPS of $0.67 (GAAP EPS: $0.04) on revenue of $5.565B. Both top and line performance fell short of even reduced expectations. That said, adjusted net income printed up 23% at $1.095B as that revenue print was good for growth of 29.2%. The lion's share of the adjustments made to net income and earnings per share were made for the amortization of acquired intangible assets.
Adjusted gross margin improved to 50% from 48%, meeting expectations, as adjusted operating margin decreased from 24% to 23%.
Gaming: Net revenue increased 13.7% to $1.631B, producing $142M in operating income (-38.5%). Growth was driven by higher semi-custom product sales (think XBox and PlayStation), but that was offset to a degree by decreased graphics revenue.
Data Center: Net revenue increased 45.2% to $1.609B, producing $505M in operating income (+64%). The strong quarter for this segment was driven by sales of EPYC server processors. Xilinx FPGA sales were strong as well. Readers may recall that the Data Center was the very reason for our investment. While strong, this segment can not carry the firm.
Embedded: Net revenue printed at $1.303B, up from $79M, producing $505M in operating income, up from $23M. This growth was really driven by the Xilinx acquisition. Management acknowledged that this business has increased the firm's exposure to the defense, automotive and communications industries.
Client: Net revenue decreased 39.6% to $1.022B, producing $-26M in operating income, down from $+490M. This is the segment where shipments really softened due to a weaker environment for PC demand as well as the firm's, and industry's, own inventory issues.
For the current quarter, AMD expects to see revenue of $5.5B (+/- $300M). This would be growth of approximately 14%. The firm sees both the Embedded and Data Center segments growing as both the Client and Gaming segments do not. Wall Street was at a rough $5.83B on this number. Adjusted gross margin is seen at roughly 51%.
For the full year, AMD looks for revenue of $23.5B (+/- $300M). This would amount to growth of about 43%. Wall Street was looking for $23.87B. Again, the Data Center and Embedded will lead. Full year adjusted gross margin of 52% is expected.
In the press release, Chair and CEO Lisa Su commented, "Third quarter results came in below our expectations due to the softening PC market and substantial inventory reduction actions across the PC supply chain. Despite the challenging macro environment, we grew revenue 29% year over year driven by increased sales of our data center, embedded and game console products. We are confident that our leadership product portfolio, strong balance sheet, and ongoing growth opportunities in our data center and embedded businesses position us well to navigate the current market dynamics."
About That Balance Sheet...
AMD ended the quarter with a net cash position of $5.591B and inventories of $3.369B. This shows a smallish decrease in cash and a 27% increase in inventories over the past three months. That places current assets at $14.42B due to growth in accounts receivable. Current liabilities add up to $6.691B, which is also higher due to increased accounts payable. This places the firm's current ratio at 2.16 and the firm's quick ratio at 1.65 (even with increased inventories). These ratios are very strong.
Total assets add up to $67.811B. This includes "goodwill" of $24.187B, which at 35.7% of total assets is higher than I like, but certainly not out of line. Total liabilities less equity comes to just $13.269B, including $2.466B in long-term debt. The firm could pay off this debt more than two times over out of pocket. This balance sheet is golden.
Since Tuesday evening, I have found 11 sell-side analysts that are rated at four or five stars by TipRanks and have opined on AMD. Of those 11, there are eight "buy" or buy-equivalent ratings and three "hold" or hold-equivalent ratings. The average target price across the 11 is $93.09. This is a bit misleading as that includes a high of $200 (Hans Mosesmann of Rosenblatt Securities) and a low of $65 (Tristan Gerra of Robert W. Baird).
Obviously that high target is an outlier. Once omitting the high and the low, the average target price of the other nine drops to $84.33.
I remain long AMD, but just a partial... 25% of my position a year ago. This has been a year where investors were forced to trade names like this far more frequently than they had in the past. It was either that or stand there and take a punch to the nose. I am not in bad shape at all on the balance, with a net basis of $58.72.
I saw the stock trading higher overnight and into this morning. I guess Wall Street must be feeling a sense of relief in that it could have been worse or perhaps relief that the data center is as strong as it is and that the firm still expects to grow overall sales moving forward.
Personally, I found nothing in this report that would provoke my exit. I have great faith in the abilities of Lisa Su. By that same token, I saw nothing that would provoke a rush to increase my stake. Inventories are still a problem that will take time to reset. Corporate spending on the data center and digitization as well as gaming could be subject to domestic and global macroeconomic conditions, and the entire Chinese market is subject to US-Sino relations. I will only add at a discount until some of these issues either resolve or are clarified in some way.
Readers can see that the stock has colored within the lines for a full year now as the share price has eroded. Now, AMD fights to take and hold its 21 day EMA. That would be at least something. With the 50 day SMA in rapid decline and the shares suddenly on the rise, I will be watching intently as those two forces move toward each other. Should AMD retake its 50 day line, much of Wall Street will jump on board and so will I.
Until then, I'll go out to December 16th and write (sell) the $50 AMD puts for about a buck. Am I willing to add at a net basis of $49? Yes. I am also willing to take in the premium and not end up buying the shares.