AMD: Data Centers Remain Robust

Investment Thesis

The decline in real income is negatively affecting one of AMD's (NASDAQ:AMD$Advanced Micro Devices(AMD)$ ) main markets - PCs and notebooks. In Q4 2022, the market accelerated itsdeclineto 28% YoY, and according to various forecasts in 2023, itwill stillshrinkby 5-10% YoY. Data centers and embedded processors remain AMD's stable segments thanks to a more solid technology stack following the acquisition of Xilinx and Pensando.

2023 will remain a year of challenges for AMD as competition with NVIDIA intensifies and moves from the declining gaming GPU market to data centers.

In our opinion, this is not an attractive entry point for long-term investors. HOLD

Despite the negative macroeconomic background, AMD continues to show strong results in the data center segment. Its revenue amounted to $1655 million, which is 42% higher than last year's results, including Xilinxperformance.

Segment operating income also remained stable at $444 million, up 20% YoY. Operating margin was 27%, down 5 p.p. YoY and 4 p.p. QoQ.

AMD is showing strong results in this segment, thanks to the announcement of the 4th Gen EPYC processor in November.The latest EPYC processorsare 2 times more productive and 80% more energy efficient than the competitors' products. Processor sales are just ramping up, so we expect the segment to continue its steady growth in 2023.

In addition, demand for the Xilinx Alveo X3 and Pensando DPUs from financial institutions is growing, driven by improved supply chains and strong demand from AMD clients.

AMD is also preparing to launch the MI300 in test mode and its mass release is to be in H2 2023. The MI300 is the industry's first chip to combine CPU, GPU, and memory. It is 5 times more productive and 8 times more energy efficient than MI250 used in the fastest supercomputer.

However, short-term orders for supercomputers have become fewer and the GPU segment revenue has declined.

Therefore, we have slightly revised our 2023 revenue forecast for the data center segment downwards from $7.1 bn (+17.5% YoY) to $7.06 bn (+16.8% YoY), and upwards from $8.3 bn (+16.9% YoY) to $8.4 bn (+19% YoY) for 2024.

Client segment is shrinking

AMD client segment revenue reached $903 million, down 51% YoY, on the back of an extremely weak PC market, which declined 28% YoY in Q4, and the absence of significant new gaming franchises.

Amid a sharp decline in demand and increased segment's inventory, its operating income totaled ($152) million compared to the Q4 2021 result of $530 million.

AMD's gaming segment was more resilient, generating $1644 million, down 7% from the last year's result. Operating income amounted to $266 million and operating margin was 16%, recovering to the 2021 average.

AMD's CPU marketsharewas 35.2% in Q4 2022 versus 33.6% in Q3 2022. Q1 2023 sees AMD's market share growth to 35.5% due to the launch of the latest Ryzen 7000 processors and Ryzen 7045 mobile processors.

CPU Benchmarks

Despite market share growth, we expect the overall market to shrink in H1 2023 amid high inventories in the sector which will normalize in mid-2023, and the market will continue to recover.

As a result, we have revised the 2023 client segment revenue forecast downwards from $5.3 bn (-14.5% YoY) to $4.2 bn (-32% YoY) and the 2024 forecast downwards from $6.9 bn (+30% YoY) to $5.5 bn (+31% YoY). We have also revised downwards the gaming segment revenue forecast from $8.5 bn (+25% YoY) to $7.7 bn (+13% YoY) for 2023, and from $11 bn (+29% YoY) to $10 bn (+30% YoY) for 2024.

AMD financial results

As a result of the segment revenue revision, we have revised AMD's 2023 total revenue forecast downwards from $26.5 bn (+12.2% YoY) to $24.9 bn (+5.5% YoY), and 2024 total revenue forecast downwards from $32.5 bn (+22.6% YoY) to $30.3 bn (+21.7% YoY).

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We have revised our EBITDA forecast downwards from $8055 mln (+34% YoY) to $4817 mln (-11% YoY) for 2023 and from $10109 mln (+25% YoY) to $6661 mln (+38% YoY) for 2024 due to the following factors:

• Lower client segment revenue forecast, leading to a decline in operating margin to (17%) vs. the historical level of 31%. AMD produces significantly more chips than it sells, which results in operating loss.

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Valuation

We are evaluating AMD's fair value price based on 2024 EV/EBITDA multiples, and think the fair value price for the stock is $82. We are evaluating the fair value price of AMD stock by discounting projected prices in 2024 at the rate of 13%. Fair value price in the table depicted below is without discounting at the rate of 13%. We are assigning a HOLD rating to the shares. The potential upside is 0.5%.

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Conclusion

Now the macro environment in AMD's main markets is unfavourable. CPU market is going down amidst declining PC and notebook purchases, and GPU market falls due to the longer technology upgrade cycle and lack of high-profile releases in the gaming industry. The data centre and embedded chip segments, where Xilinx holds a large share, remain a safe haven for AMD.

We do not expect strong AMD financial results in 2023 and believe that market recovery may start in Q3 2023, so this is likely not the time to consider purchases. For now, the assumptions about inventory decline and demand recovery are under question.