To The Moon

Over the past few years, Advanced Micro Devices, Inc ($Advanced Micro Devices(AMD)$) has always been a beat or two behind its ostensible cousin Nvidia (with their respective founders being literal cousins). AMD's latest earnings release for Q2 2024 posted modest gains against analysts' consensus expectations by posting revenues of $5.84 billion for the quarter versus an expectation of $5.72 billion and with earnings per share (EPS) of $0.69 (adjusted) versus an expectation of $0.68. 

The modest gain over expectations indicates that the company's growth was largely predictable and well in line with its ongoing transformation to becoming yet another Nvidia. 

Trend Drilldown

As early as 2021, AMD was driven by being both a long-standing default choice of processor for many a computer manufacturer client as well the budget-minded gamer. In the year so far, those days are increasingly in the company's rear view mirror:

Source: AMD Financial Statements; Leverage Shares

As expected, revenues from data centers now contribute to a little under half of net revenue. The client segment, which used to bring in half the revenue, now accounts for a quarter while the contribution from gaming has halved to under 15%. Data centers tend to be stable clients with high retention potential after an initial buy-in. Thus, like with Nvidia, AMD is now closer to the "corporate" than the "individual customer". 

This transformation has been a while in the making; the company reordered its business into the aforementioned segments from Fiscal Year (FY) 2021 onwards. Overall, line item trends are mixed but with one clear theme:

Source: AMD Financial Statements; Leverage Shares

From 2020 onwards, the company has been ratcheting up research and development (R&D) expenditure in a bid to close the gap with its rival and capture more corporate interest. In the first half (H1) of the year, cost of sales seems to be trending relative to previous year, which was also lower relative to previous year. After two full years of income decline, the current year seems to be the moment when the company is poised to claw back higher profitability. Higher expenses, however, also mean that the EPS doesn't look like it will attract the highs last seen in 2021. 

After an encouraging growth trend in 2021, "Gaming" revenues did slacken in 2023. As it stands, this slowdown seems to be manifesting in the current year, with both revenue and operating income trending to close at half of the previous year's levels by the end of the current year. "Client" revenues, however, have had some strong swings: after a dip into operating loss territory in 2023, this segment is poised to post some strong relative improvements, with revenue surging well above par. 

While "Client" and "Gaming" segments have somewhat mixed trends, "Data Center" and "Embedded" segments show strength. Outside of a slowdown in revenue and operating income growth for the "Data Center" segment in 2023, overall trends are generally positive. Operating income and revenue for the current year are already running well above par relative to the previous year in the "Data Center" segment while the "Embedded" segment is running under par. Now, it bears remembering that both segments are somewhat inter-related: the "Embedded" segment deals with accelerator hardware based on "system-on-a-chip" (SoC) architecture-driven products that are predominantly accelerator hardware for areas such as Internet of Things (IoT), Edge Computing and Cloud solutions - which bring them very close to the orbit of data centers.

Strategic Moves

Outside of financials, "AI" is a prevalent thread in nearly every hardware solution and product currently on offer. In the "Data Center" segment, Microsoft's Azure has instances running on the company's MI300X chips, which are touted as providing leading price/performance for GPT workloads. Even the "gaming" segment - languishing it is - has witnessed an expansion of ROCm 6.1.3 software support to improve AI deployment on select variants of the company's Radeon desktop GPUs.

However, as the article analyzing the earnings of AMC's main foundry partner TSMC indicated, institutional sentiment is cooling on the hype cycle driving AI and seeks clearly defined and quantifiable objectives behind value propositions. With that in mind, a number of major players except Nvidia have banded together earlier this year to form the Ultra Accelerator Link (UALink) Consortium that seeks to define an open industry specification towards standardizing the interface for AI and Machine Learning, High-Performance Computing (HPC), and Cloud applications for the next generation of hardware. With business being driven mostly by "corporates", widespread adoption of these standards will be relatively swift and likely to make clear definitions of advances. 

With the company offering a more complex series of "blended" solutions that balances between hardware and software to derive benchmarks on cost-efficient performance whilst helping define and drive standards on AI-relevant hardware, there are some strong arguments to support the notion that this company's relevance within next-generation computing is only beginning. If that were the case, this would be an early price point to adopt the stock into one's portfolio. 

On the other hand, this quarter (and perhaps the next) will likely be dominated by classics such as energy and financials continuing to draw capital away from "tech" stocks, particularly since the "AI" hype leaves a lot to be desired in terms of analyzing potential impact of innovations. The likes of UALink are bound to be useful in that regard; absent that, skepticism might continue to depress the high price ratio valuations, which both the company's stock and that of Nvidia have in spades. 

Cautious optimism and an inquiring mind would be in order.

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Note: Investors with access to European exchanges can consider Exchange-Traded Products to boost gains on short-term stock trajectories in either direction. LSE ticker AMD3 gives a 3X daily-rebalanced exposure to the upside of the stock while LSE ticker AMDS is the equivalent of a short but without a margin requirement.

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For broader articles that deep-dives into business and culture in Asia, visit asianomics.substack.com. The latest article has the full analysis of China’s commodity import trends to derive a picture of its economic health and was prominently featured on MarketWatch. Next is the English-language version of my article on South Korea’s Hankyung TV regarding the effect of Donald Trump’s reelection prospects on the economy.