Justin Sullivan
Elevator Pitch
My investment rating for Advanced Micro Devices, Inc.’s (NASDAQ:AMD) stock is a Buy.
I previously upgraded AMD from a Hold to a Buy with an article written on July 12, 2022 highlighting that “AMD’s stock can rebound to $100.” Advanced Micro Devices’ shares did cross the $100 mark in early-August when its stock price rose by +36% from $76.36 (at the point of publication of my earlier update) to $103.91 at the end of the August 4 trading day.
However, AMD’s stock has pulled back in the past month or so with its last traded price being much lower at $79.61 as of September 7, as a result of weak semiconductor industry conditions. As such, I have published the current article on AMD to answer the question of whether AMD remains as an attractive pick in the semiconductor space.
I am of the view that AMD continues to deserve a Buy rating. AMD’s shares have underperformed recently, but I don’t think that this is justified. In the coming quarters, AMD should be able to prove to the market that it can deliver strong top line growth and maintain its profitability even when the semiconductor market at large is weak. This will be the key positive re-rating catalyst for Advanced Micro Devices, which supports my Buy rating on the stock.
AMD Stock Key Metrics
I have a favorable view of the key metrics for AMD that relate to its most recent quarterly financial results and full-year management guidance.
AMD’s top line grew by +70% YoY and +11% QoQ to $6,550 million in the second quarter of this year. The company’s Q2 2022 revenue represented a new historical high, and this was the 11th quarter running that it had delivered a YoY sales expansion in excess of +26%.
In terms of market expectations, Advanced Micro Devices’ second-quarter top line came in +0.3% better than what Wall Street analysts were anticipating. On a peer comparison basis, revenue for Intel Corporation (INTC) decreased by -16% QoQ and -17% YoY in Q2 2022, which fell short of the sell-side’s consensus top line expectations by -15%.
The company’s actual Q2 2022 non-GAAP earnings per share or EPS of $1.04 exceeded the sell-side’s consensus bottom line forecast of $1.03 per share. It was also the ninth consecutive quarter that AMD managed to beat market expectations with its earnings.
More significantly, Advanced Micro Devices kept the company’s full-year fiscal 2022 management guidance unchanged at a time when many companies are having to lower expectations of their near-term financial performance. Notably, AMD is expecting its revenue to rise by a robust +60% (midpoint of guidance) in FY 2022, and the company sees its gross profit margin expanding significantly from 48% in the prior fiscal year to 54% in the current fiscal year.
At the company’s recent Q2 2022 earnings briefing, AMD specifically mentioned that “there is a set of new product ramps (in the fourth quarter) that we’re very excited about”, and this is the major factor which is supportive of the company’s top line expansion for FY 2022.
Separately, Advanced Micro Devices’ 6% gross profit margin expansion for the current year is expected to be largely driven by a growing proportion of revenue contributed by the Data Center and Embedded business segments. The Embedded and Data Center segments boast superior profitability as compared to its Client and Gaming segments, and AMD’s goal is to have the Data Center and Embedded segments account for over half (versus slightly above 40% now) of its top line in the future.
Notwithstanding the company’s reasonably good Q2 2022 financial numbers and FY 2022 guidance, AMD’s shares have done poorly in the past month. The S&P 500 corrected by -5% in the last month, but Advanced Micro Devices’ stock fell by -21% over the same period. I think that AMD’s stock price underperformance is related to industry-specific issues rather than company-specific factors, as I detail in the next section.
How Is The Semiconductor Industry Now?
The current state of the semiconductor industry isn’t great as evidenced by industry data.
The most updated July 2022 Blue Book industry data report (not publicly available) published by World Semiconductor Trade Statistics, or WSTS, was recently released on August 31, 2022. As indicated on the WSTS website, the Blue Book report provides data on “worldwide semiconductor shipments covering 205 product categories by revenue and 241 product categories by units.”
Based on the July 2022 Blue Book, global semiconductor sales reversed from a +6.2% YoY growth in June 2022 to a -1.8% YoY decline in July 2022, as a -4.7% YoY contraction in unit shipments was partially offset by a +1.7% YoY increase in average selling price or ASP. On a MoM basis, worldwide semiconductor sales dropped by -11.3%, as a result of a decrease in both ASP (-3.2%) and unit shipments (-8.6%).
Is AMD A Good Semiconductor Stock?
AMD is still a good semiconductor stock, despite the fact that the current conditions in the semiconductor industry are challenging. In a nutshell, semiconductor sales are showing signs of weakness as discussed in the preceding section, but AMD is grabbing a larger slice of the semiconductor market in specific segments.
A sell-side analyst from Goldman Sachs (GS), Toshiya Hari, posed a question at AMD’s second-quarter call, asking if Advanced Micro Devices will “become more correlated with the broader market.” This is a very relevant question, as AMD naturally won’t be a good stock pick if its business performance is affected by the health of the broader semiconductor market to a large extent.
In response to Toshiya Hari’s query, AMD replied by emphasizing that the company is “still underrepresented” even though it is “a larger piece of the market” now. In other words, AMD’s expected revenue accretion from market share gains will be sufficient to more than offset the downside risks to its future sales brought about by weakness in the global semiconductor industry. This is why AMD is a good stock or company in a “bad” industry (for now given that semiconductor sales are in a downtrend).
Is AMD Stock A Good Long-Term Investment?
AMD is currently at the very early stage of realizing the company’s true share growth potential in certain markets, and this makes the stock a very good long-term investment.
The numbers suggest that Advanced Micro Devices isn’t anywhere close to peaking in terms of market share gains.
AMD accounts for less than a fifth of the desktop PC processor market, boasting a share of 18.8% as of June 30, 2022 as per data sourced from Mercury Research. AMD’s market share in the notebook processor segment is higher at 27.0%, but the company’s current share as of end-Q2 2022 still only represents slightly over a quarter of this specific market’s total sales. Similarly, Advanced Micro Devices’ share of the server processor market in terms of revenues was less than a quarter or 22.9% to be specific as of the second quarter of 2022 based on Mercury Research.
I wrote about AMD’s rival, Intel, in a recent article published on August 26, 2022. In that article, I highlighted that Intel has acknowledged that it has been grappling with “execution issues”, and I noted that this is the main reason why “I don’t have the confidence that the company can achieve its plans and targets in the long run.” I see Intel’s challenges relating to execution being a positive for AMD’s market share expansion potential in the long term.
Is AMD Stock A Buy, Sell, or Hold?
AMD stock stays a Buy. The sell down in AMD’s shares in the last month is a buying opportunity, as “the baby gets thrown out with the bathwater.” The general outlook for the broader semiconductor industry is poor as seen with recent industry numbers, but AMD is well-positioned to outperform the semiconductor industry as a whole thanks to market share gains.
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