MORGAN STANLEY: AMD guided in line with our recently reduced numbers for September – below the street – but maintained full year guidance, implying upside to our December target. While expectations may have been higher, we think this is an impressive result given the current environment.
Our take: We continue to like the opportunity here, though we can understand some disappointment. Decelerating momentum can be painful for growth stocks; the first small shortfall after several quarters of upside – as we see here with the company guiding below consensus for September – can imply that meaningful headwinds have emerged.
When times are good, companies typically can push revenue into the subsequent quarters, and the first weaker quarter can be seen as a reversal of that.
Having said that, this deceleration was obvious,and mostly discounted in our view. In fact, we cutnumbers on Sunday to almost the exactnumber that the company guided to tonight,and heard almostno pushback from investors that we have known to be bullish.
Last week, Intel guided for one of the worst inventory correction in the history of the company. We knew about those headwinds. And still, the company posted solid results, and maintained full year guidance.
We don’t think this story is riskless going forward, and we continue to be modestly below consensus for 4q and 2023, but nothing in semiconductors feels riskless right now, and AMD continues to trade at a sharp discount to other growth names. Numerous Intel delays position the company to grow nicely next year even assuming that we remain in tough market conditions.
Server momentum offsets weakness in graphics, and weakness in client microprocessors that was less challenging than expected.
In 2q, AMD was able to grow the client CPU business slightly from 1q, with 25% y/y growth – fairly remarkable given Intel’s unit declines of close to 35%,and the very real Intel comments that there is a historic level of inventory correction at some OEMs – though client is likely to be down q/q in 3q. Graphics will also be down. But server momentum remains strong, with multiple hyperscale projects queuing up to transition from Intel to AMD.
While supply catching up to demand will undoubtedly clean up some double ordering, that momentum is likely to continue even through a cloud digestion period.
Having said that, we continue to model cautiously given the environment – but on our derisked numbers we continue to like the stock. We understand the implied guidance for 7% q/q growth in December – server momentum, as well as 5 nm product launches for both client CPU and GPU – but we will stay a bit more cautious, primarily on the GPU side where we see a fairly meaningful inventory overhang. For next year, we also remain below the company’s suggested 3 year growth rate, given our view that there continue to be tough industry conditions.
But we are below consensus on nearly everything in our coverage, and we are closer for AMD than peers. While our base case is slower growth, consensus is more possible here than other growth names we cover, yet the multiple is meaningfully lower.
Details on the quarter June revenue of $6.550bn (up 11.3% q/q and up 70.1% y/y) beat the Street at$6.528bn, but was below our estimate of $6.586bn. On a segment basis, Data Center revenue was $1.486bn (up 14.9% q/q and 82.8% v/v). Client revenue was $2.152bn (up 1.3% q/q and 24.5% y/y), Gaming revenue was $1.655bn (down 11.7% q/q and up 31.9% y/y), and Embedded revenue was $1.257bn (up 111.3% q/q and 2,227.8% y/y).
Gross margin came in at 54.0% (up 141 bps q/q and 647 bps y/y), coming in-line with the Street, but below our estimate of 54.3%. EPS of $1.05 came in ahead of the Street at $1.03 and below our estimate of $1.06.
We continue to like the stock, as share gain opportunities will help stabilize inventory digestion in consumer end-markets. We continue to underwrite strong growth in data center (CPU, GPU, and FPGA) products, as the end-market remains robust and share gain opportunities are strong, to offset concerns around PC and GPU weakness, where risks have been pricing in to the stock over the past several months. Ultimately we see solid value in shares at current levels, with a multiple that lies below historical averages, adding further downside protection.
The stock has been strong in the past month, which reduces upside somewhat, but valuation is reasonable compared to other high growth semis names, at about 20x next year’s EPS, and we like the positioning of the company, relative to peers, continuing to take share to soften the blow of decelerating end-market risk. We don’t expect the multiple to be overly high – our PT of $102 is based on 24x our 2023 MW estimate of $4.27 (including stock compensation expense), or about 22x non GAAP; we remain OW.
