AMD: Gaining Ground Against Its Competitors

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Mark Schiavo
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Summary

  • AMD announced great Q1 earnings and had excellent guidance that has already baked in current headwinds.
  • The acquisitions of Xilinx and Pensando are helping AMD enter into new markets and capitalize on increased demand for servers.
  • The weak PC market and supply chain issues continue to cause trouble for the semiconductor industry.

Semiconductor Maker Advanced Micro Systems Reports Quarterly Earnings

Justin Sullivan/Getty Images News

Advanced Micro Devices, Inc. (NASDAQ:AMD) announced a strong Q1 earnings report, with guidance that shows a bright future for the company. Recently, the company acquired Xilinx and Pensando, which will help expand AMD's total addressable market ("TAM") and capitalize on the expanding cloud computing industry. Even though a weak PC market and supply chain issues are serving as risks for the company, AMD has already considered this and is still expecting great growth. Combine this with the fact that the stock appears to be undervalued, and AMD becomes a very attractive investment.

Q1 Earnings and Guidance Show a Bright Future

In the first quarter of 2022, AMD announced fantastic fundamentals and guidance. To start, the company achieved about $5.9 billion in revenue, a 71.2% increase from 1Q21. Furthermore, the company announced an EPS of $1.13, beating consensus estimates by $0.20.

For the second quarter, management is expecting $6.5 billion in revenue, which is an estimated growth of 69% over 2Q21. As for FY22, management expects $26.3 billion in revenue, up 60% compared to 2021. Both of these estimates are expected to be driven higher by the acquisition of Xilinx and increased demand for server chips. It is important to mention that these estimates have already factored in current concerns with the PC market and supply chain, which will be mentioned later in this article.

Xilinx and Pensando Will Be Great Additions to AMD

AMD is trying to expand its audience to other industries. Specifically, the company acquired Xilinx, which will help AMD reach industries including AI, 5G, automotive, industrial, aerospace and defense. In the 6 weeks after the transaction closed, Xilinx generated $559 million in revenue and $233 million in operating income. As for the whole first quarter, Xilinx generated $1.04 billion in revenue, up 22% when compared to 1Q21.

The acquisition of Pensando is part a strategy to expand business into cloud computing and servers. Pensando has huge customers including Goldman Sachs (GS), IBM Cloud (IBM), Microsoft Azure (MSFT), and Oracle Cloud (ORCL). This will help further expand AMD into the cloud computing industry and create strong relationships with industry giants. This acquisition is also meant to help AMD compete with Intel's (INTC) and Nvidia's (NVDA) digital processing units, further improving its market share against the two biggest rivals.

AMD is Gaining Ground on Intel and Increasing its Market Share

Intel has been the long-time leader in chip sales to data centers. However, AMD is gaining ground, and its sales to cloud giants are increasing greatly, even doubling since last year. This allowed this segment of AMD to increase revenue by 88%, while Intel's revenue from data centers only increased by 22%.

AMD is gaining ground in server unit market share.

Server Unit Market Share (Tom's Hardware & Mercury Research)

AMD is also gaining ground in segments outside of data center sales. In both Desktop PCs and Notebooks, AMD is continuing to gain market share steadily and outperform many of its competitors, including Intel. If market share growth continues to follow this trend, AMD could become a clear industry leader in computer and server chips.

AMD is gaining market share in notebooks and mobile computers

Notebook Market Share (Tom's Hardware & Mercury Research)

AMD is gaining market share in desktop PCs.

Desktop PC Market Share (Tom's Hardware & Mercury Research)

The Weak PC Market and Supply Chain Issues Serve As Risks for AMD

An ongoing story with the semiconductor industry is supply chain concerns. COVID-19, China's zero tolerance policy, and the Ukraine-Russia conflict have been causing supply chain issues globally, especially for semiconductors. Taiwan Semiconductor Manufacturing Company (TSM), AMD's main supplier, has already raised prices and plans to implement even further price hikes of 5%-9% in 2023.

This may seem like terrible news for AMD. However, many analysts are saying the semiconductor shortage could ease in the second half of 2022. Counterpoint Research has stated that the gap between supply and demand for semiconductors is likely to decrease by the end of 2022. The report focuses on China due to it being one of the largest semiconductor manufacturing companies worldwide. It states that the supply for chips in many devices, including PCs, is increasing and will continue to do so throughout 2022. If China can keep COVID-19 under control, then analysts are confident supply chain issues will begin to subside for semiconductors later this year.

As for the PC market, sales exploded in 2020 and 2021 as the pandemic forced people to work from home. Now, the PC market is slowing down and this is a huge problem AMD has to face. Lower PC sales means fewer companies are buying AMD's chips to put in their devices. In the first quarter of 2022, PC shipments declined by 6.8%.

It is important to note that this is largely caused by a decrease in demand for Chromebooks by schools. If Chromebooks are excluded from calculations, the PC market actually increased by 3.9% since last year. Another interesting note is the increased sales of business PCs caused by hybrid work and the return to offices. If this trend continues, AMD may need to focus more on business PCs and laptops to keep up with rising demand.

AMD Appears to Be Undervalued

AMD's stock is down nearly 35% YTD and continues to fall due to tech sell-offs and concerns with the semiconductor industry. This has caused the company's valuation price to become very attractive for many investors.

Chart
Data by YCharts

When using analyst consensus estimates for FY23 and combining them with the average ratios of AMD's competitors, a fair value of $122.92 can be calculated. This implies an upside of about 29.79% when compared to the current price.

Average multiples for semiconductor companies

Average Multiples for Semiconductor Companies (Created by Author)

Price target and fair value for AMD

Price Target for AMD (Created by Author)

As for analysts, the consensus 12-month price target for the company is currently $131.71. This gives an implied upside of 36.77%.

What Should Investors Do?

AMD is a very strong semiconductor company that continues to gain market share in almost every segment. First quarter earnings and guidance show a bright future for the company and has already baked in the current headwinds the company is facing. The acquisitions of Xilinx and Pensando will help AMD expand into industries it has not had strong appearances in before, as well as capture profit from the growing cloud computing and server industries.

Although the PC market is currently weak and supply chain issues continue to cause trouble, many analysts are suggesting these headwinds could fade by the end of 2022. Due to all of this and the fact that AMD appears to be currently undervalued, I believe applying a Buy rating is appropriate.

This article was written by

Mark Schiavo profile picture
552 Followers
Ever since I was young, I have always been fascinated by the stock market. Over the years, I have continued to expand my knowledge by reading books related to the market, taking courses that help improve my skills (such as Valuation, Corporate Finance, etc.), and listening to meetings from historically successful investors.*Disclaimer: Mark Schiavo has a shared association with another Seeking Alpha author named Chase Fida.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AMD over 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.

Additional disclosure: Disclaimer: Mark Schiavo is not a Registered Financial Advisor or Financial Planner. This article is purely for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transactions. The information in this article should not be considered as investment or financial advice on any subject matter. Mark Schiavo disclaims all liability in respect to actions taken based on any or all of the information in this article. Given the volatility of the markets, consult with a financial advisor.

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