Advanced Micro Devices ( AMD ) reported fourth-quarter earnings on Tuesday, despite continued weakness in the PC market, showing the semiconductor company has the wherewithal to continue growing and gaining market share. Revenue rose 16% year-over-year to $5.599 billion, beating analysts’ expectations of $5.5 billion, according to estimates compiled by Refinitiv. The adjusted earnings per per share (EPS) fell 25% year-over-year to 69 cents per share. share, slightly above the 67 cents per stock, as analysts had predicted. With its fourth-quarter results, Club Holding AMD achieved record 2022 annual revenue of $23.60 billion, with earnings per stock at $3.50 apiece, helped by the integration of semiconductor company Xilinx. The $35 billion price tag for the acquisition, which was first announced in October 2020, was arguably too expensive. But the deal was ultimately necessary for AMD as it helped it expand its data center business, boost margins and further diversify away from PCs. Shares of this chipmaker are up slightly after hours, building on today’s move of nearly 4% and 16% gain for the year. Bottom Line Despite industry-wide headwinds, including a chip glut and soft PC demand, AMD managed to beat low expectations. More importantly, AMD appears to be nearing the bottom of the cycle in its PC business, known as its client unit, a key turning point that could signal the end of the earnings cuts that derailed its growth story last year. But as one pain point seems to be nearing its end, a new one may emerge. The company’s management flagged on Tuesday that some of its cloud customers are digesting inventory right now, meaning they are working through what they currently own and 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 experience a similar inventory correction to the PC division, which saw a significant boost in demand from Covid. -19 pandemic. This digest sounds more temporary in nature, and management sounded quite bullish around the second half of 2023 based on conversations with clients. It indicates that the company expects to increase production as demand accelerates. With AMD continuing to gain market share in its cloud operations and its embedded franchise – which sells lower-complexity processors for end markets such as the communications, industrial, healthcare, automotive and aerospace sectors – they remain the long-term drivers behind this growth story intact. This quarter and forward guidance were far better than the dismal quarter rival Intel reported last week — with AMD continuing to dominate a market Intel once owned. We maintain a 2 rating on the stock, meaning we would wait for a pullback before buying given the stock’s roughly 16% year-to-date gain. However, we are lowering our price target to $100 per share. stock from $130 to reflect lower market multiples and some of the downward revisions that have occurred in recent months. Q4 Segment Results Data center revenue rose 42%, but was slightly softer than analysts had predicted. Still, AMD saw strong demand in the cloud, especially from North American so-called hyperscalers, or heavy cloud users, who are moving more of their workloads to AMD processors. The customer was a clear source of weakness in the quarter as revenue roughly halved and profits fell due to the ongoing inventory correction in the PC market. The good news is that this PC nightmare may soon be over, with CEO Lisa Su predicting on the earnings call Tuesday that the first quarter of 2023 should mark the bottom for the company, with growth thereafter. We’ll have to see it to believe it, but this is the most important detail we’ve been waiting for, given that freefalling PC sales have been the biggest cause of earnings cuts. Gaming revenue fell 7% as lower game graphics were more than offset by higher semi-custom chips sold for video game consoles. Gaming was a big source of upside this quarter, but we think the market is unlikely to give AMD much credit for that given the late stage of the video game console cycle. AMD makes custom chips that go into the latest versions of Xbox and Playstations. Both launched in 2020 and saw huge demand for a few years already, so this console cycle has already peaked. Embedded revenue was up significantly from the prior year, but that’s solely a function of the addition of the Xilinx business. It’s important to see this business continue to grow revenue because it generates higher margins compared to AMD’s other segments. Outlook AMD provided an outlook for the first quarter of 2023, and while it was slightly below analysts’ forecasts, it was still better than Wall Street’s worst fears — especially in light of the disastrous guidance Intel gave last week. AMD expects first-quarter revenue to be about $5.3 billion, give or take $300 million, compared with consensus estimates of about $5.5 billion. This figure represents a decline of about 10% year-over-year due to declines in PC and gaming units, partially offset by growth in the embedded and data center divisions. Sequentially, embedded revenues are expected to increase, providing some upside, while gaming and PC revenues are expected to decline, in line with seasonality. The data center business needs to be closely watched because revenues are expected to fall as some cloud customers work through increased storage levels. No specific financial guidance was provided for full 2023, but management expects the data center and embedded 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 mainly due to product mix, with cloud revenue expected to be lower sequentially. It’s a bit of a disappointment, but the margin improvement looks promising as the company moves through the year. AMD expects flat 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 of the PC business. (Jim Cramer’s Charitable Trust is long AMD. See here for a complete list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Lisa Su, president and CEO of Advanced Micro Devices Inc. (AMD).
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Advanced micro-devices (AMD) reported fourth-quarter earnings Tuesday, despite continued weakness in the PC market, showing the semiconductor company has the wherewithal to continue growing and gaining market share.
