AMD Earnings: Soft Guidance Doesn’t Deter Our Positive Thesis on Cloud Growth

AMD AMD reported first-quarter results consistent with our expectations thanks to strong data center and embedded (Xilinx) revenue. Despite ongoing PC weakness, tepid enterprise demand, and elevated inventories at cloud customers, we remain positive on AMD’s data center business. We expect AMD’s latest 5-nanometer Genoa server CPUs to enjoy robust market share gains at Intel’s expense in the coming quarters. Shares of narrow-moat AMD are undervalued relative to our unchanged fair value estimate of $115 per share. During after-hours trading, shares were down nearly 7%, which we attribute to weak second-quarter guidance. Nevertheless, we anticipate strong double-digit revenue growth for AMD in the second half of 2023, led by share gains in the data center segment and a modest recovery in PCs.

First-quarter sales fell 9% year over year to $5.4 billion. Data center revenue was flat year over year at $1.3 billion, with cloud sales up a strong double digit year over year, offset by weakness in enterprise and non-CPU products. Although cloud sales were up year over year, they declined sequentially due to elevated inventories at cloud customers, which is expected to persist in the second quarter amid a weaker macroeconomic environment. Despite the significant demand for GPUs that train large language models, we don’t believe AMD’s MI300 GPUs have a corresponding software ecosystem to take on Nvidia’s GPU hegemony.

Client computing sales declined 65% year over year to $739 million due to weaker demand and elevated inventories. We expect PC units to be down at least 10% this year, with management viewing the first quarter as the bottom for AMD’s client business. Gaming sales fell 6% year over year as lower GPU sales more than offset higher game console chip sales for the latest Xbox and PlayStation. Embedded sales were $1.6 billion, led by industrial and communication demand. Non-GAAP gross margins fell 110 basis points sequentially to 50% due to a less favorable mix.