AMD’s Negative Preliminary Results Don’t Deter Our Long-Term Positive Outlook; Shares Undervalued

Advanced Micro Devices (AMD) announced preliminary third-quarter results after the Oct. 6 close that included revenue of about $5.6 billion, well short of management’s original guidance of $6.7 billion. The primary driver of the shortfall was weakness in the client PC segment (down 53% sequentially and 40% year over year to $1 billion). We had been anticipating a slowdown in PC sales following robust demand in recent years from COVID-19-induced work- and learn-from-home trends. However, AMD had been gaining market share at Intel’s expense, which had enabled it to grow despite a weaker overall PC market. After incorporating the softer third-quarter results and lowering our fourth-quarter revenue assumptions, we are reducing our fair value estimate for narrow-moat AMD to $115 per share from $130.

The shares fell about 13% following the news and continue to trade at a discount to our fair value estimate. Although we think AMD’s PC exposure will prove challenging over the coming quarters, we think the firm’s data center business should continue to exhibit strong growth thanks to superior products relative to Intel. Consequently, we think long-term investors should find AMD shares attractive at current levels.

Many peers—such as Nvidia, Intel, and Micron—have already issued weaker outlooks for the second half of 2022, though AMD’s announcement could indicate even greater cuts to PC assumptions. Notably, Micron’s CEO expects PC units to decline in the midteens for 2022.

Positively, data center sales came in at $1.6 billion, up 45% year over year and relatively consistent with our estimates. The firm also took an inventory write-off of about $160 million, which drove gross margins down to 42% (versus 46% last quarter). Management previously expected AMD’s top-line growth to be about 60% for 2022 (which includes the acquisition of Xilinx). Based on our revised estimates, we now anticipate full-year sales growth of 46%.