After the bell tomorrow, we’ll receive fiscal fourth quarter results from Advanced Micro Devices, Inc. (NASDAQ:AMD). The currently-prevalent recessionary environment has weighed down on semiconductor companies across the globe, and investors would be anxiously waiting to see how AMD’s revenue gets impacted in its upcoming earnings report. But, in addition to tracking its headline financial figure, investors may also want to monitor AMD’ purchase obligations, inventory levels, segment financials, and its management’s outlook for the year ahead. These items will better highlight how the chipmaker is wading through muddy waters and are likely to influence where its shares head next.
Key Operating Metrics
Let me start by saying that rampant inflation and rising interest rates have weighed down on the consumer demand for computing devices. Two different research firms – namely Gartner and Canalys – have independently come to the common conclusion that PC sales plummeted in Q4 CY22. So, even though AMD has been gaining share at the expense of Intel Corporation (INTC) and Nvidia Corporation (NVDA), there’s a good chance that these gains may not be large enough to offset the industry-wide weakness in PC demand this time around.
For all we know, AMD might very well succumb to these macroeconomic headwinds and becomes revenue challenged at least for a quarter or two. To have a granular insight about this ongoing dynamic, we can look at AMD’s inventory levels. A sharp build up in the chipmaker’s inventory figure would suggest that its management miscalculated the demand for computing products, overstocked on inventory and is now susceptible to inventory write offs.
However, it would be ideal if AMD’s inventory levels declined or remained flat sequentially. This would indicate the chipmaker’s top brass anticipated the demand weakness in due time, it was able to cut its production orders and it perfectly managed inventory levels proactively in a bid to be frugal in these tumultuous macroeconomic conditions.
Next, we must also track AMD’s purchase commitments. This is basically the chipmaker’s obligations to purchase wafers and semiconductor substrates from its chip fabrication partners such as Taiwan Semiconductor (TSM) and GlobalFoundries Inc. (GFS), along with technology and other IP licenses. A sharp drop in this figure would indicate the management is anticipating continued weakness in PC demand and is cutting back on production orders ahead of time. But that might not necessarily be the case.
The ground reality is that production orders aren’t always fully cancellable, especially if inventory has once entered the production lines. So, for Q4, I’m expecting AMD’s inventory levels to rise at single-digit rates and its purchase commitments to decline sequentially as company gradually switches to a leaner operating model for FY23. Having said that, let’s now shift attention to AMD’s financials.
Financial Expectations
It’s worth noting that AMD classifies its revenue in 4 reporting segments, namely Data Center, Client, Gaming and Embedded. The Gaming segment is by far the largest revenue driver for the company, contributing a little over 29% of its total sales last quarter. This segment comprises of sales of discrete GPUs (used by crypto miners and gaming enthusiasts), semi-custom SoC products (used in Xbox and PlayStation consoles).
My guesstimate is that the mainstream gaming community will be withholding their purchases until budget GPUs under the 7000-series banner are eventually released in Q1 FY23. Similarly, Sony Group Corporation (SONY) and Microsoft Corporation (MSFT) are expected to release newer iterations of their respective PlayStation and Xbox consoles later this year, so the gaming segment could be revenue challenged in Q4. The segment typically posts sequential revenue growth rates in excess of 20% but, due to the aforementioned factors, I estimate its growth rate to decelerate to 10% in Q4 and its revenue to amount to $1.79 billion.
AMD’s Data Center revenue, on the other hand, has exhibited little to no cyclicality. The chipmaker rolled out a few datacenter accelerators in the last couple of years which are already giving fierce competition to Nvidia’s finest. Since there isn’t any catalyst at play that would disrupt this status quo, I expect AMD’s data center revenue to continue growing another 5% sequentially, with its revenue coming in around $1.69 billion for Q4.
The embedded segment includes the sales contribution from already-established FPGAs, adaptive SoCs and ACAP products. There aren’t any catalysts at play that would materially drive sales of this segment higher in Q4, so, I’m anticipating AMD’s embedded sales to increase only marginally by 2% and expect its revenue to come in at $1.32 billion for the quarter.
The client segment comprises of sales of microprocessors and APUs that are meant for desktop and personal notebooks. We already saw earlier in the article that PC shipments declined considerably during Q4, in spite of it being a holiday quarter, so AMD’s client segment is likely to bear the brunt of this demand weakness. I expect AMD’s client revenue to decline 35% sequentially, with its revenue for the quarter amounting to approximately $664 million.
This brings us to a company-wide revenue estimate of $5.47 billion. Coincidentally, my estimate is in range with the Street’s consensus that’s spanning from $5.42 billion to $5.74 billion at the time of this writing.
But having said that, also pay attention to AMD management’s outlook for Q1 FY23 and for the year ahead in general. Specifically, is the management looking to cutback orders in a bid to be financially frugal during recession, or are maintaining their production levels with the expectation of a quick demand resumption and aggressive market share gains over larger rivals. This, in my opinion, will set investors’ sentiment in the year ahead.
Final Thoughts
AMD’s shares are trading at 5.3-times their trailing twelve-month sales. This may seem huge in isolation but it’s actually quite low when seen in tandem with industry comparables. The chart below indicates that many of the chipmaker’s popular semiconductor peers are trading at even higher Price-to-Sales multiples even though their pace of revenue growth is much lower. So, I believe that AMD makes for a compelling buy at current levels, for investors with a long-term time horizon.
As far AMD’s upcoming earnings report is concerned, I estimate the company will succumb to the industry-wide slump in consumer demand, its revenue will amount to roughly $5.47 billion and its shares will remain distressed for the time being at least. In essence, investors with a short-term time horizon are likely to feel the pain of this slowdown.
But investors with a multi-year time horizon may want to accumulate AMD’s shares while they’re still relatively discounted. AMD’s rapid growth trajectory and attractive valuations make it a compelling buy at current levels. But before placing the buy orders, monitor the chipmaker’s inventory levels, purchase commitments, segment revenue and its management’s outlook for the year ahead, to get a better understanding of growth prospects. Good Luck!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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