AMD: Already Baked In
Summary
- AMD is now priced for serious weakness in the chip business while the data continues to support strong growth.
- The company remains supply constrained with Intel still forecasting chip challenges until 2024.
- The stock trades at only 15.5x '23 EPS targets, providing plenty of cushion for unexpected weakness.
- This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »
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Advanced Micro Devices (NASDAQ:AMD) has fallen a massive amount this year that any major cut to financial targets is already baked into expectations. Amazingly, the chip company has faced a multi-year issue with supply constraint problems, yet the stock market built a view of supply needing to already be cut. My investment thesis remains ultra Bullish on the chip company now trading below $90 due to the Intel (INTC) earnings disappointment.
FINVIZ
Strong Expectations
AMD ended 2021 reporting blistering results and guided to 2022 revenues of $21.5 billion for 31% growth. The amount didn't include results for Xilinx with expectations to boost total revenues, but the growth rate will slow with the addition of that business.
The suddenly tight market for consumer electronic goods could no doubt cause a cut in growth expectations, or at least limit some of the upside guidance for future quarters. The major saving grace for the stock is the focus on edge computing and higher performance devices requiring more advanced chips and data center technology.
AMD excels in these areas, providing the price-performance needed by modern chip demands. All while the chip company has been focused on these higher-margin sales with supply constraints, peer Intel has reclaimed low-end chip sales.
On the Q4'21 earnings call in February, CEO Lisa Su was adamant sales were supply-constrained leading to the ability of Intel to capture these low-end sales from AMD. The chip company guided to 2022 revenue growth of 31% based in part due to supply constraint issues while Intel just reported a quarter with negative growth. If anything, AMD could still hit these targets to reach $21.5 billion revenues before the Xilinx business by just getting to a point without supply constraints. The market has to make a dramatic shift for the chip company to need to cut revenue targets due possibly to customers double ordering.
An area with the biggest supply constraint bottlenecks resolved in recent months is in the GPU segment where NVIDIA (NVDA) dominates a much smaller AMD. As the Verge highlights, graphics cards have regularly sold for years now far above list prices with most prices falling some 30% in the last few months, though at still elevated levels. In several cases, retailers are actually still keeping GPUs in stock at prices not far above MSRP. The sector is clearly in better supply now, but a market in supply/demand balance doesn't mean a cut in revenues for AMD. The chip companies weren't participating in the marked-up prices of retailers.
Even Intel provided weak Q2'22 revenue guidance due to some inventory burn at OEM customers in the PC segment due to some China and Russia-related inventory reductions. Per CFO David Zinsner on the Q1'22 earnings call:
Further, component supply constraints continue to be a challenge with the most recent COVID lockdowns in Shanghai, further increasing supply chain risk and contributing to inflationary pressures that are having a negative impact on PC TAM for the year. As a result, we're seeing OEMs continue to lower inventory levels to better match demand and align with other system components. We expect elements of this inventory burn to continue in Q2, subsiding in the second half of the year. Although these headwinds have reduced our CCG revenue forecast, we expect CCG revenue to increase in the second half of the year as a return to normal seasonality boost demand, OEM inventory burn subsides and the ramp of our leadership, Alder Lake and Raptor Lake products position us to compete per share.
Regardless, CEO Pat Gelsinger still predicted chip supply challenges to exist all the way into 2024.
Supply Constraints
Over the last few years, AMD has grown so quickly that even growing wafer capacity with manufacturing partner TSMC (TSM) hasn't allowed the chip company to keep up with demand. With a small revenue base compared to market share leader Intel, the market has limited clarity on how much demand actually exists for AMD products in a scenario with unlimited capacity.
The market can extrapolate from recent Intel earnings that the chip giant has constantly sold far more chips than expected, leading to some speculation the company caught overflow demand AMD was unable to supply.
Going back to 2019, Intel has consistently beaten analyst estimates by a wide margin of regularly around 5%. With quarterly revenues approaching $20 billion, a 5% revenue beat amounts to $1 billion in additional sales. Outside the September quarters of the last couple of years, the sales beats were easily in the $1 billion range.
Seeking Alpha 
Considering the propensity for Intel management to guide to weak results and suddenly beat those targets, one must consider whether the chip giant isn't just unexpectedly keeping share from a supply-constrained AMD. The chip company just can't produce 3x to 5x more chips to out-supply Intel, even in a scenario where market demand is equal for chips from both companies. After all, Intel has already reported a series of quarterly reports with declining revenues in part due to divestitures.
My previous research had the market predicting that AMD with Xilinx would generate over $25 billion in sales this year with an EPS potential of $4.00 this year and $5.50 next year. Currently, analysts have the 2023 EPS target at just $4.85.
The question is whether any of the revenues making up this prediction are at risk. The PC sector is definitely slowing as evidenced by statements from TSM and Intel.
In the last few quarters, AMD has lost market share to Intel in the desktop/mobile segment with the company shifting chip production to the more valuable data center segment. As an example, desktop market share peaked in Q1'21 at 19.3% and share dipped to 16.2% during Q4'21 according to Mercury Research.
Tom's Hardware
On any slowdown, AMD could possibly shift more supplies to these segments where the company recently outlined winning up to 200 chip designs for mobile. Remember, the chip company entered the year with 31% growth forecasts (likely cut to 27% based on including Xilinx business) while Intel isn't growing. A logical conclusion is that AMD is only losing market share where the company chooses.
Takeaway
The key investor takeaway is that AMD appears poised to continue producing record results and meeting targets. Maybe the chip company doesn't provide a dramatic guide up similar to the last year or so, but the stock price has already baked in actual weakness in the business.
The stock trades at 17.7x analyst EPS targets for 2023 and my EPS target has AMD trading close to 15.5x goal of $5.50 per share. Investors should use this weakness to build up a position in a growing tech story still in the early innings.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (147)
Let's hope. So many signs exist that the market has hit levels only present during the last few market crashes 2000, 2008 and 2020, yet the US economy might not even fall into a recession.
Define threat? $AMD still doesn't have equal market share to $INTC. Don't see any product being much of a "threat" until AMD has market share to lose. No company wants to go back to a 90%+ Intel dominated market, so even a better chip from Intel could still lead to more sales to AMD.
The auto opportunity is massive. $QCOM has an order book of $16B now and forecasts $3.5B in annual sales in a few years.
Yes, Dr. Su had the analysts apologizing for their crazy statements on the business plateauing. She is the best CEO.
Having certain chips ready to go isn't the same as not having supply constraints in other areas.
-Revenue of $5.9B (+71.2% Y/Y) beats by $330M.
-For the second quarter of 2022, AMD expects revenue to be approximately $6.5 billion vs. $6.36B consensus, plus or minus $200 million, an increase of approximately 69% year-over-year and approximately 10% quarter-over-quarter. The year-over-year increase is expected to be driven by the addition of Xilinx and higher server, semi-custom and client revenue. The quarter-over-quarter increase is expected to be primarily driven by Xilinx and higher server revenue. AMD expects non-GAAP gross margin to be approximately 54% in the second quarter of 2022.-For the full year 2022, AMD now expects revenue to be approximately $26.3 billion vs. $25.45B consensus, an increase of approximately 60% over 2021, up from prior guidance of approximately 31%, driven by the addition of Xilinx and higher server and semi-custom revenue. AMD expects non-GAAP gross margin to be approximately 54% for 2022, up from prior guidance of approximately 51%.
Is that even real research? $INTC still has to use TSM. -For example, I highlight a substantial risk of AMD losing its console business to the much cheaper Intel Foundry Services option, since cost is critical for consoles.
The Xilinx deal closed on 2/14, so this quarterly report should be the first major discussion of the combined entities.
The Xilinx deal closed on 2/14. The consensus estimates include the 45 days of Xilinx estimates while your whisper numbers only appear to include $AMD beating their stand alone guidance. -For the first-quarter, AMD said it expects revenue to be between $4.9 billion and $5.1 billion, up roughly 45% year-over-year and 4% sequentially, with non-GAAP gross margins of 50.5%. For all of 2022, AMD expects sales to be $21.5 billion, a jump of 31% over 2021, with non-GAAP gross margins of approximately 51%.