Summary
Advanced Micro Devices' strategic positioning in the semiconductor market is not being fully appreciated by investors.
Lessons from Intel's Q2 earnings report suggest AMD is winning competitively.
AMD is well-positioned to benefit from AI adoption and the transition to flexible architectures and instruction sets.
We believe the stock is undervalued and the risk/reward remains attractive.
David Becker
Thesis
Advanced Micro Devices, Inc. $Advanced Micro Devices(AMD)$ is set to report earnings today after the close. We believe that investors are not appreciating AMD's strategic positioning. AMD remains undervalued at these levels.
Lessons from Intel
When Intel $Intel(INTC)$ reported Q2 earnings, they disclosed that their Data Center and AI segment earned revenue of $4.0 billion, which was down 15% from the year-ago period. In addition to this decline in revenue growth, the company had negative operating margins in this segment. In light of Nvidia's $NVIDIA Corp(NVDA)$ massive guidance raise, the weakness of Intel's Data Center and AI segment appears to be company specific. If this is true, then AMD may indeed be taking more market share from Intel in HPC. Intel's continued negative margins imply that they are struggling to retain customers and must result to undercutting on price in order to remain competitive.
We believe that AMD is gaining continued share on Intel in HPC, and see these trends continuing for the foreseeable future.
AMD's Strategic Positioning
AMD's competitive strength and market share gains are likely to continue due to their competitive positioning and adaptability. The company is poised to benefit from AI adoption and is able to tailor their compute solutions for different use cases/instruction sets because of their flexible architecture and design mentality.
Upcoming Earnings
AMD reports earnings on the 1st, and we believe the report will prove that they are continuing to gain share on Intel in HPC. Look for signs that the PC market is showing signs of firming up and that AMD's fundamentals are beginning to trough. AMD could give a massive guidance raise like Nvidia did, however, we wouldn't bank on this.
Investors are likely underappreciating AMD heading into earnings, and we believe this is a buying opportunity.
Price Action
AMD has had a wonderful 2023 with shares up over 76%. If the AI boom continues, it's likely that AMD's shares will continue to rally, as long as their fundamentals improve.
Data by YCharts
Data by YCharts
Valuation
AMD's GAAP P/E ratio is very high, mostly because of the large amount of amortization costs tied to the Xilinx acquisition.
Data by YCharts
AMD's Q1 Earnings Release
On a price to sales basis, AMD is trading far below Nvidia's P/S valuation. We believe that this gap will merge over time as AMD gets more appreciation for their AI exposure and Nvidia grows into their valuation.
Data by YCharts
The bull case for AMD is based on future growth and not their current earnings power. The trend of AI adoption and increasing HPC demand will likely bode well for AMD and result in increased revenue and profitability.
AMD is trading at 39.91 forward P/E according to YCharts' data, but we believe this understates their true earnings potential. We think the company can earn $5 on a non-GAAP basis next year. Putting a 35x multiple on that gives AMD a share price of $175. AMD is currently trading at an attractive valuation for long-term investors if they are bullish on AI and HPC going forward.
Data by YCharts
Risks
In addition to the risks we mentioned in our previous write-up, a risk to AMD is if companies are purely increasing their GPU count and are not increasing their CPU count. This would mean that Nvidia's massive guidance raise gives no clues as to the demand for datacenter and AI CPUs. It would also mean that Intel's declining revenues in their Data Center and AI segment aren't entirely their fault. This risk appears to be muted for the time being, as Nvidia can't get enough supply to fully satiate demand, likely resulting in companies such as AMD picking up the slack and increasing their revenue as a result.
We view the risk/reward as being attractive at these levels, but investors should be aware that semis remain a cyclical industry and have a lot of exposure to geopolitical risk.
Key Takeaway
AMD is attractively valued going into earnings. We believe the market is not fully appreciating their strengths and growth prospects. In light of Nvidia's massive guidance raise and Intel's Q2 report, it seems likely that AMD is continuing to take share from Intel and will likely see increased demand for HPC solutions in the same way that Nvidia has.
Source: Seeking Alpha
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