Advanced Micro Devices Earnings: Squarely in AI Accelerator Mix; Maintain Valuation

Narrow-moat Advanced Micro Devices AMD reported solid second-quarter results and gave investors a healthy outlook for the rest of 2023. We’re most encouraged by the firm’s disclosure that its artificial intelligence customer engagements “grew by more than seven times sequentially,” as the firm is poised for a strong ramp of AI graphics processing units starting in late 2023 and into 2024. We remain optimistic about Advanced Micro Devices’ chances to emerge as a second source to Nvidia in GPUs in AI training and inference. We maintain our $130 fair value estimates and view shares as fairly valued.

Revenue in the June quarter was $5.36 billion, down 18% year over year, but was flat sequentially and ahead of the midpoint of guidance of $5.3 billion. Client revenue was down a whopping 54% year over year, but rose 35% sequentially, as the severe PC inventory correction is starting to wind down and PC market conditions appear to be improving. Data center revenue fell 11% year over year, but was up 2% sequentially. Advanced Micro Devices saw soft demand for processors in traditional server workloads in both the enterprise and with cloud customers, but based on Nvidia’s rosy outlook, such customers are clearly shifting their purchases away from processors from AMD and Intel and toward Nvidia’s GPUs for AI. However, AMD is engaged with AI customers and its next generation MI300X AI GPUs are sampling today. Adjusted gross margin came in at 49.7%, in line with guidance, and we still view a path for expansion toward AMD’s long-term target of 57%.

Revenue in the September quarter is expected to be $5.4 billion-$6.0 billion, which, at the midpoint, would represent growth of 6% sequentially and 2% year over year. AMD expects data center and client revenue to grow as much as 20%-plus sequentially, thanks to server, AI, and supercomputer demand. Meanwhile, client revenue should be up quite a bit sequentially and year over year as PC demand starts to recover.