Advanced Micro Devices (AMD) reported fourth-quarter earnings topped Tuesday, despite continued weakness in the PC market, demonstrating that the semiconductor company has the capabilities to continue growth and capture market share. Revenue jumped 16% year-over-year, to $5.599 billion, beating analyst expectations of $5.5 billion, according to estimates compiled by Refinitiv. Adjusted earnings per share (EPS) fell 25% year over year, to 69 cents per share, just ahead of the 67 cents per share that analysts had expected. With its fourth quarter results, Club Holding AMD posted record annual 2022 revenue of $23.60 billion, with EPS of $3.50 per share, boosted by the merger of semiconductor company Xilinx. Arguably, the $35 billion price tag of this acquisition, first announced in October 2020, was prohibitively high. But the deal was ultimately essential for AMD, helping it expand its data center business, increase profit margins, and further diversify away from PCs. Shares of this chipmaker are up slightly after hours, based on today’s move, up nearly 4%, up 16% this year. Conclusion Despite facing industry-wide headwinds, including a glut of chips and weak PC demand, AMD managed to outperform low expectations. More importantly, AMD appears to be nearing the bottom of the cycle in its PC business, known as the customer unit, a major inflection point that could signal the end of the profit cuts that spoiled its growth story last year. But as a point of pain draws to a close, a new point can emerge. The company’s management noted on Tuesday that some of its cloud customers are absorbing inventory right now, meaning they’re working from what they currently own, slowing new orders. We’ll monitor cloud spending over the next few months, but it’s unlikely that AMD’s cloud business, or data center unit, will undergo an inventory correction similar to that of its PC division, which has seen demand spike from the Covid-19 pandemic. This digestion seems temporary in nature, and management seemed very optimistic about the second half of 2023 based on conversations with clients. This indicates that the company expects to increase production as demand accelerates. As AMD continues to gain market share in its cloud operations and its embedded franchise — which sells less complex processors to end markets such as the telecom, industrial, healthcare, automotive and aerospace sectors — the long-term drivers of this growth story remain intact. This quarter and future guidance was much better than the dismal quarter competition Intel reported last week — with AMD still dominating the market that Intel once had. We maintain a rating of 2 on the stock, which means we’ll wait for a pullback before buying, given the stock is up nearly 16% year-to-date. However, we are lowering our price target to $100 per share from $130 to reflect lower market multiples and some downward revisions that have occurred in recent months. Fourth Quarter Segment Results Data center revenue increased 42% but was slightly lower than analysts expected. However, AMD has seen significant demand for the cloud, especially from North Americans called ‘hyperscalers’, or heavy cloud users, who move more of their workloads to AMD processors. The customer was a clear source of weakness in the quarter as revenue nearly halved and profit declined due to the ongoing inventory correction in the PC market. The good news is that this PC nightmare may be over soon, as CEO Lisa Su predicted on the earnings conference call Tuesday that the first quarter of 2023 should mark a bottom line for the business, with growth after that. We’ll have to see it to believe it, but this is the key piece of detail we’ve been waiting for, since the complimentary drop in PC sales was the biggest driver of the bottom line. Gaming revenue fell 7% as lower game graphics were more than offset by semi-custom chips being sold in video game consoles. Gaming was a big source of upside this quarter, but we think the market isn’t likely to give AMD much credit given it’s late stage in the video game console cycle. AMD makes custom chips that go into the latest Xbox and Playstations. Both were launched in 2020 and have been in massive demand for a few years already, so this console cycle is already peaking. Embedded revenue was up significantly year-over-year, but that’s just a function of adding Xilinx’s business. It’s important to see this business continue to grow revenue because it generates higher margins compared to other AMD segments. Outlook AMD provided forecasts for the first quarter of 2023, and while they were slightly below analysts’ expectations, they were better than Wall Street’s worst fears — especially in light of the disastrous guidance Intel provided last week. AMD expects first-quarter revenue of about $5.3 billion, give or take $300 million, compared to consensus estimates of about $5.5 billion. This number represented a decline of approximately 10% year-over-year, due to declines in PC and game consoles, partially offset by growth in the consolidated and data center divisions. Sequentially, embedded revenue is expected to increase, providing some upside, while gaming and PC revenue is expected to decrease, consistent with seasonality. The data center business should be watched closely because revenue is expected to decline as some cloud customers operate through elevated inventory levels. No specific financial guidance has been provided for the full year of 2023, but management expects the data center and combined segments to grow year-over-year. AMD expects operating margins to be around 50% in the first quarter of 2023. The slight decline in margins from the fourth quarter of 2022 is mostly attributed to product mix, with cloud revenue expected to decline sequentially. This is a slight disappointment, but the margin progression looks promising as the business progresses through the year. AMD expects flat profit margins in the first half, followed by expansion in the second half — a function of growth in the higher-margin cloud and embedded segments, as well as some normalization in the PC business. (Jim Cramer’s Charitable Trust is AMD long. See here for a full list of stocks.) As a subscriber of the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim places a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charity fund portfolio. If Jim talks about a stock on CNBC, he waits 72 hours after the trade alert is issued before executing the trade. The above investment club information is subject to our terms and conditions and privacy policy, along with our disclaimer. No fiduciary obligation or duty will be created, or created, by virtue of your receipt of any information provided in connection with Investment Club. There are no specific results or guaranteed profit.
Lisa Su, President and CEO, Advanced Micro Devices Inc. (AMD).
Bridget Bennett | bloomberg | Getty Images
advanced micro devices (AMD) reported that fourth-quarter earnings topped Tuesday, despite continued weakness in the PC market, showing that the semiconductor company has what it takes to continue growing and grab market share.