On Tuesday evening, long-time Sarge fave Advanced Micro Devices (AMD) released the firm's first quarter financial results.
For the three month period ended April 1st, AMD posted adjusted EPS of $0.60 (GAAP EPS: $-0.09) on revenue of $5.35B. The adjusted EPS print did manage to beat Wall Street, as did that revenue number despite a 9.2% contraction from the year ago comparison. As we will get to, the quarter reported was not the problem, the stock was significantly lower (-6%) in early morning trading.
Regular readers will recall that - and this is no way a boast - in the April 6th Market Recon column, I informed readers that I had taken some profits in both AMD and Nvidia (NVDA) going into earnings season, not because I had lost faith in either company, for I have not. I took some chips off of the table as a means of protecting gains made. Nothing more. In all, I had reduced my long position in AMD. For the moment, that's good news. I also held onto 65% of the shares I held when my position was 'full." For the moment, that's tough news. (Even down 6%, this name has been a winner and that position is up more than 40%.)
The real question is "what now?" Do I sell more and protect my 40%+? Do I add, after having successfully extracted capital from this position in order to reestablish my original size?
The Quarter
GAAP gross profit dropped 16% to $2.359B as gross margin decreased from 48% to 44%. Operating expenses increased 29% to $2.514B. This dropped operating income/loss to $-145M from $+951M, as operating margin fell all the way from 16% to -3%. This left net income/loss at $-139M versus $+786M for the year ago comparison.
On an adjusted basis, gross profit dropped 14% to $2.675B as gross margin decreased from 53% to 50%. Operating expenses increased 18% to $1.587B. This dropped operating income/loss to $1.098B (-40%), as operating margin fell all the way from 31% to 21%. This left net income/loss at $970M (-39% from the year ago comparison).
The lion's share of the adjustments made were for the amortization of acquired intangible assets and for stock based compensation expense. So far, I am not impressed, and I am admittedly prone to a positive bias when it comes to this firm, its stock, and its CEO Lisa Su.
Segment Performance
- Gaming revenue decreased 6.3% to $1.757B (beating expectations), as operating income decreased 12.3% to $314M. This still robust business was impacted by lower sales of gaming GPUs, but also increased sales of semi-custom chips.
- Embedded revenue increased 162.5% to $1.562B (beating expectations), as operating income increased 188.1% to $798M. The gigantic gains made in this space, while positive, were simply a function of acquiring Xilinx since the year ago comparison.
- Data Center revenue increased 0.2% to $1.295B (missing expectations), as operating income decreased 65.3% to $148M. Growth in cloud sales has been almost completely offset by reduced sales in the enterprise business, leaving performance below consensus view.
- Client revenue decreased 65.2% to $739M (missing expectations), as operating income decreased to $-172M from $+692M for the y/y comparison. This is where the firm's oversupply of inventories has resulted in far lower than once hoped for selling prices. The firm did indicate however, that the quarter just reported was likely the bottom for this business.
Guidance
For the current quarter, AMD now expects to drive revenue of $5.3B (+/-$300M). This brought the midpoint of these projections below the $5.5B that Wall Street was looking for. The firm also sees an adjusted gross margin of 50%, which was in line with Wall Street's expectations.
On AI
CEO Lisa Su addressed the coming of artificial intelligence during the call. Su said...
"Our AI activities increased significantly in the first quarter, driven by expanded engagements with a broad set of data center and embedded customers."
Su then went through a number of the firm's businesses where AI is already making an impact. Too many initiatives for me to list here, and then added...
"We are very excited about our opportunity in AI. This is our #1 strategic priority, and we are engaging deeply across our customer set to bring joint solutions to the market, led by our upcoming Instinct MI300 GPUs, Ryzen 7040 Series CPUs with Ryzen AI, Zynq UltraScale+ MPSoCs, LVO V70 data center inference accelerators and Versal AI adaptive data center and edge SoCs."
Wall Street
Since these earnings were released last night, I have found 13 sell-side analysts that have both opined on AMD and are rated at a minimum of four stars (out of five) by TipRanks. Across those13 analysts, and after allowing for changes, there are seven "buy" or buy-equivalent ratings and six "hold" of hold-equivalent ratings. One of the "holds" chose not to set a target price, so we are working with twelve targets.
The average target price for AMD across these 12 analysts is $96.50 with a high of $120 (Christopher Rolland of Susquehanna) and a low of $81 (Gus Richard of Northland Securities). After omitting these two as potential outliers, the average target across the other 10 drops to $95.70. Just as an FYI, the average target across the seven "buys" is $103.57, while the average target across the five "holds" is $86.60. I see the stock was recently trading with an $84 handle.
My Thoughts
I still like AMD. I still like Lisa Su. I think it's obvious that Su sees a better H2 2023 for AMD than what the firm is now going through. Su also fully intends to compete with the big dogs (Nvidia's Jensen Huang?) for a leadership post in the burgeoning growth vehicle that will be artificial intelligence.
The stock closed on Tuesday at 29 times forward looking earnings. As much as we don't like it in real time, this morning's selloff was probably necessary and could even end up having been healthy.
Harsh as this morning's selloff seems, this will not change trend unless the weakness drags the stock all the way down to the mid-$70's. That's fine with me. The stock's 200 day SMA (simple moving average) stands at a rough $79, and if one looks closely at the end of January/start of February, one sees a still unfilled gap (in fluorescent green) that could allow the shares to ultimately fall as low as $75.
So, the answer to the above posed question is that I will not be buying this dip in AMD. That said, I think if a trader could sell $75 August 18th puts for $4+ that this could be an attractive play. This lines the pocket if the shares never fall that far. Should the trader ultimately end up being tagged with those shares, we are talking about a portfolio add with a net purchase price of less than $71 per share, which would be at a far more reasonable valuation.
