AMD Stock Drops After Q4 Earnings Report! Wait For Dip?
Advanced Micro Devices (AMD) shares are sliding following the company’s Q4 earnings announcement. In this analysis, we'll cover the high-level takeaways, including positive highlights from the report. We'll examine gross margins, segment revenues, and, importantly, AMD’s progress in the data center market against competitors like Nvidia.
We'll also take a close look at the client computing segment, which was once the backbone of AMD’s business. How did it perform this quarter, and what does it indicate for the broader semiconductor industry, including Intel? Additionally, we’ll assess the company’s cost management, profitability, balance sheet, and inventory levels.
From a technical perspective, AMD’s stock was up about 4.5% during regular trading but is now down roughly 3% in after-hours trading. The stock is approaching two critical support levels—key areas for investors considering buying the dip. If those levels are breached, having a stop loss in place or preparing for further downside could be crucial.
Earnings Overview
Over the past year, AMD’s stock is down 31%, and year-to-date, it has slipped about 1%. Shares initially rallied today but reversed course after the Q4 earnings release.
For the quarter, revenue came in at $7.7 billion, exceeding Wall Street’s expectation of around $7.5 billion. The high-end estimate was also $7.7 billion, meaning AMD delivered strong results. Looking ahead, the company provided guidance for Q1 revenue between $7.1 billion (± $300 million), implying a possible range of $6.8 billion to $7.4 billion. Wall Street had been expecting around $7 billion, with a high-end forecast of $7.5 billion. If AMD reaches the upper end—or even surpasses it—it would boost confidence in future quarters, especially as Q2 revenue projections currently sit at $7.5 billion.
Financial Highlights
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Gross Margins: 51% (GAAP), up from 47% in the previous quarter and 50% a year ago.
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Operating Margins: 11%, improving from 6% last quarter and matching last year’s figure.
Segment Breakdown
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Data Center: This segment, which includes MI300 GPUs competing with Nvidia, saw revenue surge to $3.9 billion from $2.3 billion last year. Operating income jumped from $666 million to $1.2 billion, highlighting the profitability of selling to enterprise clients like Google, Microsoft, and Amazon.
Overall, AMD is showing strong growth in key areas, and its ability to maintain momentum in the data center market will be critical going forward. However, the stock’s post-earnings reaction suggests investors are weighing future guidance carefully.
Fundamental Analysis
AMD Expands Revenue and Profitability Across Key Segments, Despite Gaming Slowdown
AMD continues to grow its revenue and gross profit, with notable strength in its client computing business—its core laptop and PC segment. Revenue for this division surged from $1.4 billion last year to $2.3 billion this quarter, up from $1.9 billion in the previous quarter. This is a significant improvement, considering the segment was barely breaking even a year ago. Now, operating profit has jumped to $446 million, a fantastic turnaround.
Gaming Segment Faces Expected Decline
Meanwhile, AMD’s gaming business has taken a hit, largely due to the late-stage console cycle. If you weren’t aware, AMD supplies chips for PlayStation and Xbox consoles, and as most consumers already own a PlayStation 5 or Xbox Series X, demand has slowed. Back in 2023, gaming revenue was at $6.2 billion—this year, it’s dropped to $2.6 billion. However, a potential PlayStation 6 or next-generation console in the future could revitalize this segment, though that’s still several years away.
Steady Performance in Embedded Business
AMD’s embedded segment, which includes custom silicon, remains stable. This division, largely boosted by the Xilinx acquisition, provides consistent revenue and strong margins. Revenue came in at $923 million, with operating income at $362 million—comparable to the profit generated by the client computing segment despite lower revenue. The reason? Higher margins, as AMD sells these products to major enterprises rather than cost-sensitive consumers.
Balancing Strengths and Weaknesses
One of AMD’s defining traits is its diversified business model. Unlike Nvidia, which is heavily focused on AI and data center GPUs—an area currently booming—AMD operates across multiple segments. This means that while gaming and client computing may face headwinds, data center growth can offset those declines. However, it also means AMD rarely sees all of its business units performing at peak levels simultaneously.
Cost Management and Financial Considerations
Over the past year, AMD has done a solid job controlling costs. R&D expenses have ticked up slightly year-over-year but remained flat quarter-over-quarter. Marketing and general administrative expenses are also well-managed.
A key item from the most recent quarter was a $186 million restructuring charge. Excluding this, AMD’s operating income of $871 million would have been even stronger. Additionally, net income came in at $482 million, but tax obligations this quarter weighed on the final figure compared to previous quarters where AMD had tax benefits.
AMD’s Earnings Impact, Balance Sheet Strength, and Key Technical Levels
AMD’s latest earnings report shows a decline in EPS and net income compared to previous quarters, impacted by restructuring costs and income tax provisions. While these factors have temporarily weighed on profitability, they don’t necessarily indicate fundamental weakness.
Balance Sheet and Inventory Considerations
From a balance sheet perspective, inventory levels have risen from $4.3 billion to $5.7 billion. This isn't necessarily a concern if the buildup is related to data center products, but could be problematic if it’s gaming-related. However, the company’s improved gross margins in the latest quarter suggest a favorable inventory mix.
Unlike Intel, AMD maintains a lean balance sheet with minimal long-term debt. Following the Xilinx acquisition, the company took on some debt but has since worked to reduce it, demonstrating strong financial discipline.
Cash Flow
AMD’s operating cash flow in the most recent quarter was impressive at $1.3 billion, up significantly from $381 million last year. On a year-over-year basis, operating cash flow has surged from $1.7 billion to $3 billion. However, some of this increase was driven by non-operational factors, such as accrued liabilities and prepaid expenses.
One advantage AMD has over some of its competitors is that it doesn’t need to invest heavily in building its own fabrication plants. As a result, capital expenditures were minimal, with just $28 million spent on property, plant, and equipment last quarter. Instead, AMD is using its cash to repurchase stock and has also repaid approximately $750 million in debt over the past year.
Technical Levels
In after-hours trading, AMD shares have continued to decline, a concerning sign for investors. The stock is now testing its 200-day exponential moving average, a level that often serves as support. However, a break below this could signal further downside.
Over the past year, AMD’s stock has been in a downtrend, making lower highs and lower lows since February 2023. If the stock fails to hold its current level around $113–$114, the next critical support range is around $95–$96. A breakdown below this could send shares much lower, potentially into the $70s or even the $50s.
Valuation
Despite AMD’s strong business fundamentals, the stock remains richly valued. With a market cap of around $193 billion and annual operating cash flow of just $3 billion, some investors may see limited upside at current levels. AMD is trading at nearly 10 times sales, making it less attractive compared to semiconductor peers like Nvidia and Broadcom, which have higher revenues, stronger profits, and potentially more growth catalysts.
While AMD remains a great company with strong leadership, investors should carefully consider valuation and technical levels before making any moves.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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