Justin Sullivan
Well, it seems like things aren’t going as well as they could be over at Advanced Micro Devices, Inc. (NASDAQ:AMD) HQ. The company announced its earnings for the third quarter earlier this week, and while net income has increased by $202 million compared to last year, earnings per share have actually decreased from $0.73 to $0.67 due to lower client segment revenue. Ouch. The semiconductor giant also provided a forecast that was below the average analyst prediction, which is never a good sign. All in all, it sounds like AMD is going through a bit of a rough patch at the moment…but I believe there’s still value to be had.
While it’s understandable for investors to monitor bigger economic trends, there have been some promising developments in several vital business sectors that give me confidence in the company. In a bit, you’ll read about sector-specific silver linings that make me believe now is a smart time to buy the stock
Dark Clouds and Silver Linings
It looks like things are tough all over in the world of big tech. AMD CEO Dr. Lisa Su recently made a statement blaming the failure to meet profit expectations on a “softening PC market and substantial inventory reduction across the PC supply chain.” This is in striking comparison to the 71% increase in revenue observed in Q2. But AMD is not the only company that is being impacted by the present climate. A competitor named Intel (INTC) recently stated that it had a difficult quarter in terms of earnings and that it was due to a decrease in the demand for personal computers as well as a tricky economy in general. So what’s the takeaway here? It seems that even the biggest and baddest companies are struggling to adapt to changing markets and economic conditions.
This led Intel to declare that it will be implementing harsh cost-cutting measures. As a result of these actions, some people will lose their jobs. In spite of this, and to AMD’s credit, they didn’t make any such declaration since the company’s strength in other areas enabled it to continue raising its revenue in comparison to the previous year. The company’s data center and gaming sectors, specifically, were big contributors to the organization’s bottom line. As a result, total sales increased by 29% year-over-year to reach $5.6 billion despite the macroeconomic environment. Furthermore, AMD increased its gross margin and saw a rise in its net income year-over-year, both of which are indicators of the company’s robust business.
Speaking of a Robust Business…
As AMD’s 10th straight quarter of record server processor sales comes to a close, the question on everyone’s mind is: what’s next? AMD had been tight-lipped about their next-generation Genoa CPU, but we’ve slowly managed to glean a few details.
When introduced, we expect Genoa will be the world’s highest-performance processor for general-purpose computing. It’s designed to excel across a broad range of data center workloads, from enterprise to HPC to the public cloud. – AMD CEO Dr. Lisa Su (last November)
The Genoa stack from AMD will be able to utilize 96 cores and 192 threads of Zen 4, making it one of the most powerful processors on the market. In addition, Genoa’s 5-nanometer manufacturing process is twice as dense and efficient as its predecessor while still being 1.25 times faster. With such impressive specs, we’ll just have to wait and see what else AMD has in store for us with their next generation of processors.
But in the meantime, what does the release of AMD’s next generation of processors mean for industries? Let’s have a look at the following three areas.
Engineering & Design
For engineers, the ability to design and create simulations via AMD’s CPUs has provided them with the tools they need to push simulations to new levels. With the increased number of processor cores, they are able to create models with greater detail and accuracy. In addition, the faster processors allow them to run more simulations in a shorter amount of time. This is a significant advantage when trying to meet deadlines. To be more specific, this implies quicker memory access rates in conjunction with an increased number of memory channels. The data may be accessed more quickly both to and from the processor cores using both of these capabilities. When dealing with low-latency applications developed by businesses, this is an extremely important consideration.
Bioinformatics
When doing research in bioinformatics, genomics, or any other area of life science, practitioners are always anxious about the number of cores that are available in their HPC (high-performance computing) system. Researchers in the field of life sciences may now cram more processing cores into their high-performance computing environments with the help of the new AMD EPYC processors, which provide a cost per core that is more affordable than ever before.
The amount of emphasis that is being placed on virology research as a result of COVID-19 means that these AMD EPYC processors have the potential to play a role that is just as important as the researchers themselves. The ability to provide solutions that have the processing cores to manage an ever-increasing volume of data implies a quicker time-to-answer, which is to everyone’s advantage moving ahead.
Climate Modeling and Weather Simulations
The latest AMD EPYC processors provide meteorologists with a number of benefits, the most significant of which is that it makes it possible to build weather modeling systems with a greater number of cores and more powerful processors, which ultimately results in more precise and timely predictions. For instance, having the capacity to forecast wind speed and direction may assist businesses in avoiding potentially expensive catastrophes. Because of the growth in processing capacity, businesses now have access to the tools necessary to prevent injuries and safeguard property.
AMD’s Forecasts Are Not a Disaster
All in all, AMD’s forecasts weren’t expectation-crushing, and CEO Lisa Su’s commentary was most telling. Data centers seem to be weathering the economic lull better than other sectors which is a positive sign for companies like Microsoft Azure, Amazon Web Services, Tencent, and Baidu that depend on cloud servers for their businesses.
Cloud revenue more than doubled year over year and increased sequentially as multiple hyper scalers expanded deployments of EPYC processors to power their internal properties and more than 70 new AMD instances were launched by Microsoft Azure and Amazon, Tencent, Baidu, and others in the quarter. – CEO Lisa Su, Q3 conference call.
Revenue from original equipment manufacturers (OEMs) fell in the enterprise market during the most recent quarter as compared to the prior one. This is owing to the fact that server OEMs are still working through difficulties with match sets (products that must be ordered together), and some organizations have slowed down or cut down their purchases as a result of uncertainty over the macroeconomic environment.
But AWS, GCP, and Azure continue to bring new cloud regions online at an alarming rate. In other words, these companies are in it for the long haul, which is probably why chipmakers like AMD – and Nvidia (NVDA) – remain so hopeful about the data center market – despite taking a beating in the consumer space lately. Intel seems to be the only company struggling here; they’ve seen their revenues fall by 20% from this time last year. Furthermore, their data center group fell 27% year-over-year during Q3 alone. However, it’s worth remembering that Intel’s Xeon CPU came out over 1.5 years ago.
Takeaway
As anyone who’s been paying attention to the tech world knows, semiconductors are having a moment. So, especially for contrarians, it’s no surprise that they’re kicking the tires and looking at AMD as a potential investment. With that in mind, I believe that the “Bad News” is priced in and the stock is reasonably valued at around 16.5 times this year’s earnings per share.
And while there might be some short-term volatility in the stock price, I think AMD is a good long-term investment. Of course, there are always risks associated with any stock, and things like macroeconomic headwinds could lead to lackluster business numbers or more stock sell-offs. But on the whole, I believe that AMD is a good buy at current prices.
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