AMD: Can It Go Lower?

Summary

  • The semiconductor sector has been the hardest hit out of all amid the extended selloff this year.
  • Despite its high-double-digit growth expected in the current year, with continued fundamental outperformance demonstrated in 1H22, AMD has lost close to 60% of its value since peaking in November '21.
  • The stock now trades near its all-time historical low valuation multiple of under 4x EV/sales, drawing questions to whether it could trend lower.
  • The following analysis will walk through AMD's key growth drivers, as well as its looming investment risks, and perform a sensitivity analysis on its current market value to gauge whether the implied perpetual growth aligns with the company's fundamental outlook.
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Semiconductor Maker Advanced Micro Systems Reports Quarterly Earnings

Justin Sullivan

AMD (NASDAQ:AMD) continues to trade near historical low valuations at under 4x forward EV/sales, forging new 52-week troughs. The stock has suffered from protracted losses this year in tandem with the broader market selloff, with the semiconductor sector being the worst-hit cohort due to mounting macro headwinds that have led to flashing warnings of demand risks as PC shipments slow and inventories build, while protracted supply chain constraints continue to hinder growth in higher demand segments such as auto and data center end-markets. Yet, the AMD stock staged a modest gain on Tuesday (September 27), defying the broader market downtrend that led the S&P 500 towards its “sixth straight session of declines, [marking] the longest losing streak since February 2020”, and demonstrating resilience against rising recession risks amid increasingly hawkish commentary from Fed officials.

Considering AMD’s proven track record in gaining market share from rival Intel (INTC) in recent years across all capacities of computing, from PC to server processors, the chipmaker’s long-term growth prospects remain intact. AMD’s sustained long-term growth trajectory is further corroborated by the company’s relentless efforts in bettering its competitive edge through both innovation and TAM expansion by offering full-stack end-to-end solutions that include both hardware and software in recent years. Although there is uncertainty still about whether AMD’s valuation will be subjected to a further downtrend in tandem with anticipated market declines ahead of an impending recession due to rapidly deteriorating economic conditions, the stock remains an attractive long-term investment at its current all-time low levels from a multiple basis considering the company’s massive forward growth and profitability trajectory.

Sustained PC Market Share Gains

AMD has recently introduced its newest “Ryzen 7000 Series” processors for premium PC application. The latest line-up, powered by AMD’s next-generation “Zen 4” architecture, features “up to 16 cores, 32 threads and [is] built on an optimized, high-performance TSMC (TSM) 5nm process node”. As discussed in our previous coverage, the Zen 4 architecture delivers up to 27% more performance-per-watt and close to 30% more performance overall compared to its predecessor, underscoring the technology’s revamped power efficiency enabled by TSMC’s 5nm process. In addition to the Ryzen 7000 Series CPUs, AMD also unveiled the “Socket AM5” platform, an all-in-one powerhouse for gaming that combines the newest processor, new motherboards optimized for various computing needs, and enhanced connectivity capabilities to enable “faster speeds and lower latency” needed for next-generation PC gaming.

Although the latest product launches currently coincide with a weakening PC market, they are expected to compensate for some of the near-term headwinds felt across the industry by improving AMD’s presence in premium segment products, especially across commercial end-markets. This is further corroborated by AMD’s latest achievements in the commercial segment:

Commercial client processor revenue grew significantly year-over-year as HP, Lenovo and others launched more than 50 AMD-based commercial notebooks and Dell announced its first AMD-based precision workstation.

Source: AMD 2Q22 Earnings Call Transcript

The recent launch of AMD’s next-generation PC processors also builds on our earlier expectations for sustained momentum in 2H22 that will lead the chipmaker to “hurt less from softening PC demand” :

But instead of lost demand, AMD sees the current PC market shifting to “higher end [and] more premium segments”, buoyed by corporate purchases to accommodate the idea that “hybrid and remote work is the new reality”. Digital transformation trends have enabled many corporate environments to adopt a “location-agnostic” work arrangement, giving employees full autonomy on deciding where they want to work. Although AMD has opted to stay on the conservative side with regards to PC opportunities for the year, guiding a year-on-year decrease in “negative high single digits” for related sales, the company is expected to recoup some market share by selling its premium, more expensive models.

Source: “AMD: Consolidating Its Way to the Top

While AMD management has resorted to a rather conservative outlook for its gaming and client computing segments, the company remains one of the few in the industry that has demonstrated resilience against softness in the PC market, which points to continued market share gains. Recall that AMD had guided a y/y decrease in “negative high single digits” for PC processor sales during the first quarter earnings call. And just a little over a month ago, AMD also refrained from providing overly positive commentary on its gaming and client computing segments during its second quarter earnings release, and has pointed to its data center and embedded segments as key growth drivers for the year instead.

Yet, AMD’s PC processor sales continued to stage y/y growth in 1H22, while rivals like Intel and NVIDIA (NVDA) succumbed to weaker-than-expected performance over the same period due to a combination of near-term economic weakness, market share loss, and old inventory build-up across customers. And the momentum is expected to continue through 2H22 given expectations for the aforementioned premium product launches to capture renewed demand. In addition to CPUs, AMD’s commitment to “executing [its] GPU roadmap, including launching [its] high-end RDNA 3 GPUs later this year” also stands to gain share on the back of market leader NVIDIA’s near-term weakness.

Continuing Its Ride on Data Center Tailwinds

As discussed in our rolling coverage on AMD, its next-generation EPYC server processors that will begin shipping in 2H22 through early 2023 will be critical to the company’s anticipated 60%+ y/y growth planned for the current year. Recall that AMD was already forecasting more than 30% of y/y organic growth prior to its consolidation of Xilinx and Pensando in recent months, underscoring the strength demonstrated by its data center business on a standalone basis.

While the third-generation Milan EPYC server processors have been met with strong take-rates based on “record server processor sales” observed during the second quarter, the next-generation Genoa EPYC processors shipping later this year, as well as the Genoa X, Bergamo, and Siena that ships in early 2023 will further AMD’s capitalization on enterprise opportunities. The fourth-generation line-up, which addresses the needs of various enterprise applications spanning general purpose computing to cloud-optimized and communications deployments, makes AMD well-positioned for maximized TAM penetration, and inadvertently, “continued growth in the server business over the next four, six, eight quarters” until the company’s planned debut for its 5th Gen Turin EPYC processors in 2024. This, again, underscores AMD’s sprawling competitive advantage when it comes to solidifying its new-found market leadership in data center processors with continued innovation.

And similar to AMD’s increased focus on PC GPUs as mentioned in the earlier section, the company remains committed to broadening its server GPU portfolio as well over the longer term, which builds on our earlier observations of rising direction competition within a field that is currently dominated by NVIDIA:

In addition to excelling in server processors, AMD is also stepping up its GPU capabilities. The company recently launched the second generation of its data center graphic processors featuring the “CDNA 2” architecture, which fuels direct competition with current market leader Nvidia in coming years as demand from the sector accelerates. The CDNA 2 architecture delivers more than two-times the performance of its predecessor by enabling integration with AMD’s server CPU chips, making it a competitive offering in addressing HPC, hyperscale data center and AI workloads. AMD’s latest achievement in data center GPU chips is a complement to its strengthening data center strategy, and is expected to further bolster its market share in HPC and hyperscale data center applications in coming years.

Source: “Nvidia vs. AMD: Which is the Better Growth Stock?

Today, both AMD’s data center CPUs and GPUs can be found in some of the world’s best supercomputers, including “Frontier” which currently holds the “number one spot on both the Top500 list of the world’s fastest supercomputers and the Green500 list of the most energy-efficient supercomputers”, providing further validation to the chipmaker’s latest technological achievements. And AMD’s next-generation CDNA 3 architecture for data center GPUs is expected to further its prominence in data center and high-performance computing opportunities, putting key rivals Intel and NVIDIA on notice:

As a competitive offering in addressing HPC, hyperscale data center and AI workloads, the newest CDNA 3 Architecture promises “5x greater performance-per-watt compared to [its predecessor] on AI training workloads”. The newest development combines “5nm chiplets, 3D die stacking, 4th generation Infinity Architecture, next-generation AMD Infinity Cache technology, and high bandwidth memory (“HBM”) memory in a single package”, thus promising more power with less energy…

The company’s technologies, such as the “AMD Instinct MI200” series data center GPU processors powered by its existing CDNA 2 architecture, already plays a critical role in addressing the “growing demand for compute-accelerated data center workloads” for mainstream users…And the improved performance enabled by AMD’s CDNA 3 Architecture is expected to further extend that prowess, underscoring greater market share gains ahead. AMD’s newest “Instinct MI300” series accelerators will mark the first to be powered by the CDNA 3 Architecture. Extending the capabilities of the Instinct MI200 Series, the Instinct MI300 Series will deliver an “8x increase in AI training performance”.

Source: “AMD: Steadfast Amidst and Beyond the Recession

Consolidation Advantages

After the data center segment, AMD’s embedded segment - which houses sales of both AMD and Xilinx’s embedded products, such as “embedded microprocessors, GPUs, FPGAs, adaptive SoC products, and ACAP products (see here for details) - was lauded as the other most critical growth driver for the year. As the current leader in the development of FGPA and adaptive SoCs critical to communications infrastructure application, Xilinx is well-positioned to benefit from 5G-transition tailwinds, while also complementing AMD’s existing cloud data center opportunities:

Specifically, Xilinx is currently the ”leading provider of solutions in 5G” and boasts a strong pipeline of communications accounts. This accordingly complements AMD’s growing prominence within the network infrastructure sector, underscored by its recent win from Nokia to power the latter’s 5G network servers with EPYC processors. And on the data center front, Xilinx also leads fast-growing business in programmable solutions for data centers, which is poised to complement AMD’s current leadership in CPU and GPU processors for data center application...The XDNA Architecture is the newest addition to AMD’s family of offerings. Built on the “foundational architecture IP from Xilinx”, the XDNA Architecture “consists of key technologies including the FPGA fabric and AI engine (“AIE”) – core areas of Xilinx’s expertise – to enable optimized performance and energy efficiency for application in complex workloads such as AI and signal processing. The AMD XDNA IP is scheduled for debut in 2023, beginning with the integration into the AMD Ryzen series processors used primarily in powering desktop/notebooks.

Source: “AMD vs. Marvell Technology Stock: Which is the Better Buy?

Prior to AMD’s acquisition, Xilinx was on track toward 20% y/y growth for the year. Considering the anticipated merger synergies already observed through both companies’ latest introduction of the XDNA Architecture, as well as AMD’s increasing presence in the field of 5G development, alongside industry tailwinds and Xilinx’s historical growth trends, the subsidiary is expected to sustain high-single-digit to double-digit y/y growth over coming years. This continues to spell favourable prospects for AMD’s embedded segment, which currently boasts the most attractive profit margins at more than 50%, leading the data center segment’s more than 31%. With two of AMD’s most profitable segments responsible for the bulk of its growth ahead, the company readily satisfies investors’ heightened demand for both near-term cash flows as well as virtuous growth amid mounting uncertainties over the global economic outlook.

Valuation Sensitivity Analysis

Drawing on our most recent fundamental forecast for AMD, updated for its actual 2Q22 results and 2H22 guidance, as well as management’s revised segment presentation, we have performed a sensitivity analysis to gauge the implied perpetual growth in which the stock’s current market price suggests. Based on our preliminary calculations, AMD’s current share price of about $67 apiece implies a perpetual growth rate of about 5%, which approximates the blended long-term GDP outlook across the company’s core operating regions.

AMD Valuation Analysis

AMD Valuation Sensitivity Analysis - Key Assumptions (Author)

AMD Valuation Analysis

AMD Valuation Sensitivity Analysis - Key Assumptions (Author)

AMD_-_Forecasted_Financial_Information.pdf

Circling back to valuation theory:

[A company’s projected] perpetual growth rate is typically determined using GDP as a key benchmark, adjusted for maturity of the industry as well as other company-specific factors such as market leadership and/or market share. Companies operating in industries that are higher growth in nature are typically valued at a perpetual growth rate closer to or more than GDP, given their greater contributions to economic growth. Alternatively, companies operating in lower growth and/or mature industries are typically allocated a lower perpetual growth rate.

Source: “Shorting Tesla: Bridging the Lofty Valuation to Economics

With AMD engaged in a high-growth business given the significance of its product portfolio in enabling next-generation, “mission critical” technology trends that are poised for rapid demand acceleration over the longer term, the perpetual growth rate implied by its current share price is likely non-reflective of the premium upsides that the company is positioned to benefit from. This is further corroborated by AMD’s continued commitment to innovation, which accordingly bolsters an ensuing deals pipeline over the longer term to unlock further valuation gains ahead.

Can the AMD Stock Trend Lower?

The big question mark overhanging the AMD stock right now is whether it can trend lower. Mounting industry headwinds spanning PC weakness and growing fears of a broad-based slowdown in technology investments amid macro uncertainties risk further deterioration to already fragile market sentiment, which could bring the semiconductor industry another leg lower. Equities are likely positioned for further turmoil over coming months as the Federal Reserve remains committed on its policy tightening trajectory to bring down inflation, especially considering recent data on core capital goods orders and consumer sentiment that shows the economy remains resilient. Although AMD’s current price may seem that recession risks are priced-in, especially considering the stock’s gains demonstrated on Tuesday despite broader market declines as well as warnings from manufacturing partner TSMC about order cuts in the coming year, waning market sentiment is expected to brew further volatility over coming months.

However, from a long-view perspective, AMD’s favourable fundamental prospects support an ultimate return to generous upsides once broad-based market risks subside. Considering AMD’s robust capital structure, long-term growth profile, and margin expansion trajectory, which together makes the backbone of the stock’s valuation prospects, it remains a favourable long-term investment at current levels despite risks of further headache in the near term which are not expected to last.

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Disclosure: I/we have a beneficial long position in the shares of AMD, NVDA either through stock ownership, options, or other derivatives. 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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