Summary
Advanced Micro Devices, Inc. Q2 revenues of $5.36 billion beat reduced estimates and were down 18% YoY.
Client and Data Center segment revenues fell, while the Embedded segment showed 16% growth.
AMD guidance for Q3 missed street estimates, leading to concerns about future growth and competition from Intel.
David Becker
After the bell on Tuesday, we received second quarter results from chipmaker Advanced Micro Devices, Inc. $Advanced Micro Devices(AMD)$. The company has been a big winner so far this year, with shares almost doubling as investors look toward a return to revenue growth. While the Q2 results came in slightly better than expected, guidance was not that great, but shares rallied further anyway. As a result, I would suggest investors sell into strength as we re-examine the situation.
For Q2, AMD announced revenues of $5.36 billion. While this was down more than 18% over the prior year period, it did beat Street estimates by almost $40 million. Not counting last year's Q3 revenue miss, this was the second-smallest revenue beat since the start of the pandemic. Client revenues were the main drag, falling by more than half over Q2 2022, while the Data Center also fell by low double digits. The one bright spot was the Embedded segment, which showed 16% growth. Don't forget that AMD had given weak guidance three months ago, so the revenue beat for Q2 was mainly driven by reduced expectations. The graphic below shows overall segment data for Q2.
AMD Segment Data (Q2 2023 Earnings Report)
The sharp decline in revenues led to big hits all the way down the income statement. Even on a non-GAAP basis, gross margins fell by 4 percentage points year over year. With operating expenses actually rising slightly, the company's adjusted operating income was nearly sliced in half. Adjusted earnings per share at $0.58 did beat by a penny, but that was down significantly from $1.05 a year earlier. On a GAAP basis, AMD reported an overall operating loss and detailed that its net income was down 94% year over year.
While small beats are better than no beats at all, we can't say the same thing about guidance. AMD management guided to revenues of $5.4 billion to $6.0 billion, with the midpoint of that range missing the average street estimate of $5.85 billion by a decent margin. While this is a return to growth for the top line, analysts were looking for more than a 5% increase year-over-year and the midpoint suggests less than 3% growth. Non-GAAP gross margins are forecast to rise by a percentage point sequentially.
When you throw in the after-hours rally, AMD shares are up nearly 90% so far this year. A lot of that has to do with competitor Nvidia $NVIDIA Corp(NVDA)$ giving tremendous guidance due to growth in the Artificial Intelligence ("AI") space a few months back that completely set the chip sector on fire. Last week, Intel $Intel(INTC)$ reported solid results and gave strong guidance for Q3 as well. It appears that Intel's revenue troubles are behind it, which could be a major problem for AMD moving forward. AMD also did not repurchase any shares during Q2, so why should investors buy the stock if management isn't putting capital behind the stock as well?
AMD shares in the after-hours are currently going for about 27.5 times the expected 2024 adjusted earnings per share. That's a tremendous premium to Intel currently, going for about 20.2 times, and Intel is expected to show a lot more of an earnings rebound next year. At the same time, as the chart below shows, AMD shares have recently spiked above their 50-day moving average again (purple line). The average price target on the street going into this report was $134, but that might come down slightly given the weak guidance.
AMD Last 6 Months (Yahoo Finance)
In the end, AMD announced some mixed numbers on Tuesday afternoon. Q2 revenues and adjusted earnings beat estimates, but one must remember that expectations had to come down a bit for that to happen. Q3 guidance was soft as well, yet the stock is trying to hit a new 52-week high again. As a result, I would sell AMD shares into this strength, and we can look at the name again should it return below the 50-day, and we adjust our near-term expectations a bit lower.
Source: Seeking Alpha
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