Headed into AMD's (AMD 7.49%) Q4 2022 earnings report, the burning question on investors' minds was whether Intel's (INTC 6.53%) disastrous financial update the week prior would bleed over onto AMD. The short answer: AMD is fine.
The longer answer is a bit more nuanced, because the semiconductor industry (specifically the part dealing with PCs and laptops) is in the midst of one of the worst downturns in decades. However, as consumer electronics spending comes down from its early pandemic fervor, AMD is well-positioned to excel because it had already pivoted to enterprise markets as its primary moneymaker.
And in my book, that makes AMD stock a buy right now.
NASDAQ: AMD
Key Data Points
AMD looks very different from Intel these days
Before digging into the numbers, I believe there are two very important developments investors need to keep in mind. First, data centers (the computing units for the cloud, AI, and high-performance business computing of all kinds) are a secular growth trend that is propelling the semiconductor industry higher. AMD is -- and has been -- obliterating Intel on this front as it soaks up some of Intel's decades-long leadership in enterprise computing.
Second, AMD completed an all-stock acquisition of Xilinx in February 2022, cementing enterprise markets as its primary revenue generator. While it also most certainly caters to enterprise computing, Intel is still very much a consumer-centric business.
With that in mind, let's acknowledge AMD's Q4 2022 results were far from perfect. Overall revenue grew 16% year over year to $5.6 billion, thanks to the addition of Xilinx sales, which it did not have a year ago. Profit margins also contracted as AMD restricts the sale of new chips (again, primarily PCs and laptops, but also some enterprise products too) to help its manufacturing partners burn off excess inventory.
However, and this is a big "however," AMD still grew in 2022 when adding Xilinx's results into the mix as if it were part of the equation in 2021. In other words, AMD-plus-Xilinx expanded in 2022 compared to 2021. Combined pro forma revenue of the two chip designers was $24.1 billion in 2022, up 20% from $20.1 billion in 2021.
Intel's 2022 revenue fell 20% to $63.1 billion from $79 billion in 2021. Intel did exit some small non-core business in the last year, but the point is still that Intel's problems are unique to it.
But this is an AMD article, so here's a look at how AMD fared in Q4 2022. Note that most of AMD's "embedded" segment is made up of Xilinx, which hauled in just $1.01 billion in revenue in the comparable quarter a year ago, when it was still an independent entity. Basically, Xilinx was a huge win for AMD to close out 2022.
|
AMD Segment |
Q4 2022 Revenue |
YoY Change |
|---|---|---|
|
Data Center |
$1.7 billion |
42% |
|
Client (PCs and laptops) |
$903 million |
-51% |
|
Gaming (PC gaming and video game consoles) |
$1.6 billion |
-7% |
|
Embedded (mostly Xilinx) |
$1.4 billion |
1,868% |
Data source: AMD.
A top bet on enterprise computing investment
Data centers and "embedded" systems from Xilinx (communications, automotive, 5G wireless and internet infrastructure, healthcare, aerospace, etc.) were 55% of AMD's total revenue in Q4 2022. That's significant, because CEO Lisa Su and the top team expect these two areas to continue growing in 2023. This will likely be offset by continued weakness in consumer-facing "client" and "gaming" through the first half of 2023 before returning to growth.
AMD is forecasting a 10% year-over-year decline in revenue in Q1 2023 as it begins to lap its Xilinx acquisition. Adjusted gross margin will be about 50%, which compares to 53% in Q1 2022, so expect an earnings-per-share decline to kick off 2023.
However, AMD is echoing sentiments expressed by other chip designers. The first half of 2023 could be rough as inventories of PCs and laptops continue to be burned off, resulting in lower revenue and profitability for AMD. However, enterprise markets should act as a bulwark against this pain before consumer and enterprise revenue both see a strong finish to 2023 -- based on AMD's current insight on customer spending habits.
Besides having the bulk of its sales now pointed at secular growth drivers from enterprise computing, AMD is also still "digesting" elevated expenses related to purchasing Xilinx. That bodes well for profit margins bottoming and resuming their expansion later this year as well. As of this writing, AMD stock trades for 100 times 2022 earnings per share, but only 24 times one-year forward earnings per share estimates. On a free cash flow basis, AMD trades for about 41 times 2022 free cash flow generated.
AMD is likely to get a bit more "expensive" in the next two quarters as it continues to deal with depressed PC and laptop chip sales. However, the company has a clear path to growth in the back half of 2023 and into 2024. This is a great chip stock worth buying now if you believe it can keep the pressure on Intel over the long term and keep gobbling up market share.
