February Stock Tip: The Best Way to play Big Tech AI in 2023

Posted on February 11, 2023June 30, 2026 by io-fund

Recently, we wrote about the 2023 outlook and trends for overall IT spending and Big Tech capex. In summary, both are expected to be flat to slightly down. Here is what we said on the premium site:

“Overall, Big Tech has forecasted capex to be flat to slightly down y/y. However, an important theme was a shift toward higher ROI capex such as technical infrastructure and reduction in lower ROI capex, such as office facilities. After embarking on an aggressive capex program in 2021 and 2022, Big Tech has taken a pause to reassess their cost base and to reprioritize capex in light of the current macro environment.

Put another way, the size of the capex pie isn’t expected to grow in 2023 compared to 2022, but the slice spent on technical infrastructure (i.e. Cloud and AI), will grow at the expense of labor, office facilities etc. A change in capex mix that we believe is supportive in the medium-term of NVDA and AMD.”

There is a collective shift from higher return capex at the expense of lower return capex. From an investing perspective, the key takeaway is to identify markets where demand continues to be driven by secular demand and avoid those facing cyclical demand headwinds. For example, there is continued demand for Hyperscale Data Centers and AI related investments while the memory sector is grappling with weaker consumer related demand exacerbated by excess inventory.

The key theme from Big Tech Q422 commentary was the strategic importance and focus on AI investments to enhance their competitive positioning. Here at I/O Fund, we have continually looked for opportunities to invest in this secular theme and identify companies with strong market positions and competitive product offerings led by focused management teams with an identifiable investment catalyst.

With that in mind, we thought it would be worthwhile for our readers to revisit our positive investment thesis on Nvidia. It’s one of our largest core positions.

Simply put, as Big Tech continues to build out hyperscale scale data centers and AI based technology, they will require specialized semiconductor chips – AI accelerator chips – to provide the necessary computing power required. At the moment, the AI chip market is a duopoly with Nvidia and AMD. However, Nvidia’s position is much larger than AMD and a “better” GPU. So as Big Tech continues these AI related investments, Nvidia is the first place Big Tech will go to buy them – namely Nvidia’s H100 GPU chip. (Note: Later in the year, AMD will release a GPU to rival Nvidia and we will cover this for you including correct timing as the I/O Fund has predicted every twist and turn AMD has taken in its enormous comeback against Intel – for now, Nvidia has a near monopoly on GPUs for AI acceleration.)

Given the market dynamics outlined above, here is how Nvidia’s CEO Jensen Huang described the AI market opportunity in response to a question by Vivek Arya around the overall capex outlook. Huang’s comments focused on Nvidia driving growth from AI acceleration, rather than general purpose computing. This implies that capex can be flat while Nvidia will be serving the most valuable piece in the stack. AI acceleration, according to the CEO, will not be flat or down. A similarly positive tone echoed by Big Tech.

“And then, Jensen, the question for you. A lot of concerns about large hyperscalers cutting their spending and pointing to a slowdown. So if, let’s say, U.S. cloud capex is flat or slightly down next year, do you think your business can still grow in the data center and why?”

“Vivek, our data center business is indexed to two fundamental dynamics. The first has to do with general purpose computing no longer scaling. And so, acceleration is necessary to achieve the necessary level of cost efficiency scale and energy efficiency scale, so that we can continue to increase workloads while saving money and saving power. Accelerated computing is recognized generally as the path forward as general purpose computing slows. The second dynamic is AI. And we’re seeing surging demand in some very important sectors of AIs and important breakthroughs in AI.”

“And so, you could see that our company is indexed to two things, both of which are more important than ever, which is power efficiency, cost efficiency and then, of course, productivity. And these things are more important than ever. And my expectation is that we’re seeing all the strong demand and surging demand for AI and for these reasons.”

In light of Big Tech’s focus on higher return capex, Jenson’s comment was very informative on how Nvidia stands to benefit from Big Tech’s change in capex mix. As Big Tech continues to invest in AI infrastructure, they will need chips that provide the highest computing power and productivity with the most efficiency. At the moment, Nvidia’s H100 is the best AI chip to fulfill these requirements.

How will Nvidia benefit?

The key investment catalyst for Nvidia is the adoption and implementation of the H100 GPU by its customers.

So without getting too technical, here is an outline of the medium and long term investment thesis.

Nvidia’s March 2022 introduction of the Hopper H100 GPU with 80bn transistors – 48% more than Nvidia’s A100 with 54 billion – is a game-changer. Simply put, more transistors means faster speeds and increased computing power
H100 is 6x faster and its performance is 2-3x better than Nvidia’s prior A100 GPU. H100 has 50% more memory and interface bandwidths. Higher bandwidth will create more demand for their software in the future. The ability for the GPU to connect directly to the network will avoid CPU bottlenecks
The A100 has led company gains since Q22020, now the H100 will lead the next leg of growth. In the most recent Q322 investor call, management indicated H100 will quickly overtake A100
H100 will power AI based and high performance computing systems. There are four layers to Nvidia’s full stack accelerated computing: hardware (AI accelerators), system software, platform software and applications. Overtime, this position will enable Nvidia to monetize more of the software stack due to vendor lock-in effects. In the Q322 call, management indicated this is effectively starting “now” at the enterprise level
Over the long term, Nvidia will combine its hardware offering with software component primarily targeting the auto industry
Nvidia is taking a play out of Apple’s playbook that helped it’S market cap grow to 2 trillion. Nvidia’s goal is to leverage their dominate position in hardware to capture the lion’s share of the software. That’s exactly what Apple did with mobile devices and software related apps and services.
Most importantly, and not covered at the level it deserves (or at all by the media), Nvidia is going to be an AI software leader. This marks a monumental shift for a company that is traditionally hardware-only. We have written about this long-term opportunity for our premium subscribers here.
This transformation has not yet been appreciated by Wall Street nor reflected in the stock price. Nvidia’s 2022 Investors presentation identified a $300B Market opportunity.

To use a baseball analogy, Nvidia has just begun the first inning of this transformative process.

Upcoming catalysts

Nvidia is up about 52% ytd and is due to report earnings on 2/22/23. We will be looking for continued signs that gaming has bottomed, adoption trends of H100 and whether management expects a 2H23 bounce similar to what their peers guided for. We’ll touch upon these topics after the company report earnings.

It is important to note that Gaming is still an important business for Nvidia for its earnings contribution. Gaming’s exposure to consumer-related hardware products like PCs and gaming consoles has historically been the source of cyclical growth concerns and stock volatility around earnings releases. Future growth will not come from gaming, where Nvidia is already a mature, market leader. Nvidia’s 2022 Investor’s Presentation provided future estimates which detail how consumer exposure should become less of a concern to investors. Overtime, Nvidia will transform from a gaming to an AI software focused company.

There were signs that gaming weakness had bottomed in Q322 and the market may still be focused on that in Q422. Our main focus will be on H100. If the nascent signs of H100 adoption seen in Q3 continue to grow, this will increase our conviction on Nvidia and it will begin to get attention from Wall Street it deserves as 2023 unfolds.

Why 2023 May be a Strong Year for Nvidia:

Big Tech is not immune to the weaker macroeconomy nor consumer. This has been evident in their earnings releases. For Big Tech’s next capex act, their commentary focused on shifting capex to higher ROI investments with a focus on cost efficiency. These comments have increased our conviction that investments in AI are a key strategic priority and will continue.

From an investing perspective, it supports our investment thesis in Nvidia and AMD. Nvidia’s new H100 GPU chip has positioned it to benefit from the buildout in AI related and hyperscale data center infrastructure. Critically, given their dominant market position in AI chips, this will enable Nvidia to then monetize and gain a greater share in the software stack. In addition, AMD plans to commercially release its MI300 GPU this year.

Per the most recent AMD earnings call:

“MI300 will be the industry's first data center chip that combines a CPU, GPU and memory into a single integrated design, delivering 8x more performance and 5x better efficiency for HPC and AI workloads, compared to our MI250 accelerator currently powering the world's fastest supercomputer. MI300 is on track to begin sampling to lead customers later this quarter and launch in the second half of 2023.”

In the most recent earnings report, Nvidia management commented that the H100 adoption rate and software monetization at the enterprise level is happening faster than expected.

This month, keep an eye out for technical analysis from Knox Ridley, where he will go over how he plans to manage the Nvidia position in the portfolio. On a side note, he nailed Nvidia’s bottom with an entry of $108.51 on October 13th with a real-time trade alert. You will get his very best technical analysis on a leading position in the portfolio that the analyst team believes will fundamentally stand apart this year. Stay tuned for this!

In addition, Essentials Members will receive an earnings update on Nvidia following the earnings report to better gauge 2023 timing and entries.

We can’t urge you enough to take your time with each stock as too many research services pump out content for content’s sake. We are a real, live portfolio that is audited, and we show you the exact process we follow to make smart investing decisions. For the February stock pick, we want to drill down deep so our readers get top notch coverage of one of our highest conviction holdings. Don’t be surprised if you get more Nvidia coverage this month rather than moving on quickly to another name. Institutions take months to research a stock, and this level of depth is exactly what we bring to retail investors.

Have a wonderful weekend and we will see you next week!

Big Tech Capex, the Next Act – AI Take a Bow

Posted on February 10, 2023June 30, 2026 by io-fund

In the past, we have written about the importance of Big Tech’s capex programs and its impact on demand for semiconductors. Particularly in 2021 and 2022, where there was a significant increase in data center and cloud computing related capex. It has been our position that Big Tech capex – which includes Google, Meta, Amazon and Microsoft – is a leading indicator for AI semiconductor companies and has been a secular tailwind for our holdings such as Nvidia and AMD. Now that Big Tech have reported their fiscal 2022 earnings, we thought it’d be a good time to review the 2023 capital expenditure outlook for the IT market and Big Tech.

2023 IT Market Spending Forecasts

In January 2023, Gartner released their 2023 forecasts for overall IT spending. Gartner forecasts growth of $4.5 trillion, an increase of 2.2% from 2022. Looking at the breakdown, Software and IT services continue to see meaningful y/y growth. Meanwhile, after exhibiting healthy 12% growth in 2022, Data Centers is forecasted to be almost flat at 0.7% in 2023. Devices continues to be negatively impacted by inflationary pressures impacting consumer demand.

In contrast to Gartner’s 2023 forecast of flat growth in overall Data Center spending. The growth in Hyperscale Data Centers is forecasted to grow at levels that vastly outpaces Data Centers. Hyperscale Data Centers are large data centers operated by Amazon, Microsoft and Google.

According to Precedence Research, The global hyperscale data center market size was estimated at USD 62 billion in 2021 and is expected to hit around USD 593 billion by 2030, a forecasted growth rate (CAGR) of 28.52% during the forecast period 2022 to 2030.

This growth is also reflected in forecasts for the Artificial Intelligence Chip market. In December 2022, Allied Market Research forecasts that the global artificial intelligence chip market will grow from $11.2 billion in 2021 to reach $263.6 billion by 2031, growing at a CAGR of 37.1% from 2022 to 2031. AI chips – supplied by Nvidia and AMD – will provide the computing power necessary to drive these hyperscale data centers.

Big Tech FY2023 Earnings Commentary

How did the recent Big Tech commentary on 2023 capex align with these market forecasts? Overall, Big Tech has forecasted capex to be flat to slightly down y/y. However, an important theme was a shift toward higher ROI capex such as technical infrastructure and reduction in lower ROI capex, such as office facilities. After embarking on an aggressive capex program in 2021 and 2022, Big Tech has taken a pause to reassess their cost base and to reprioritize capex in light of the current macro environment.

In 2016, Big Tech in total spent $30b in capex, in 2022 they spent $150b, a five-fold increase. Big Tech commentary indicates 2023 capex will be flat to slightly lower than 2022.

What did FAAMG say about 2023?

Alphabet:

Google spent $31.5b on capex in 2022 compared to $24.6b in 2021 and forecasted 2023 to be at a similar level to 2022. Although the forecasted growth rate in capex is lower than historical levels. Management commentary around capex was very telling on where the priorities lay. On the Q422 call, management referenced AI a total of 56 times in relation to its importance to the future growth of the company. Here are a few snippets that stood out with an emphasis on AI being Google’s #1 priority.

Sundar Pichai, CEO

I'll focus on two major things today in a bit more detail, and then I'll give a shorter-than-usual quarterly snapshot from across our business. First, how we unlock the incredible opportunities AI enables for consumers, our partners and for our business; and second, how we focus our investments and make necessary decisions as a company to get there … the AI opportunity ahead. AI is the most profound technology we are working on today. Our talented researchers, infrastructure and technology make us extremely well positioned, as AI reaches an inflection point.
Our AI is a powerful enabler for businesses and organizations of all sizes and we have much more to come here. There's a few flavors of this. Google Cloud is making our technological leadership in AI available to customers via our Cloud AI platform, including infrastructure and tools for developers and data scientists like Vertex AI.
AI also continues to improve Google's other products dramatically
On the AI side, it is a really exciting time. I think we've been investing for a while, and it's clear that the market is ready. Consumers are interested in trying out new experiences. I think I feel comfortable with all the investments we have made in making sure we can develop AI responsibly.

Philip Schindler, CMO

Going forward, we are focused on growing revenues on top of this higher base through AI-driven innovation. Sundar highlighted the incredible opportunities underway with AI and the transformative impact it will have on businesses. Already, breakthroughs in everything from natural language understanding to generative AI are fueling our ability to deliver results that drive meaningful performance for advertisers and are useful to users.

Ruth Porat, CFO

And as I indicated in opening comments, when we look at capex for 2023, we do expect it's going to be generally in line with 2022 with an important mix shift. We're increasing our investments in technical infrastructure. And that's not just for AI. That's to support investments across Alphabet, in particular in Cloud as well. And at the same time, we're meaningfully decreasing our capex for office facilities.
With AI, this is obviously an Alphabet strategic priority, and we see huge opportunity ahead

Meta:

For Meta, capital expenditures, including principal payments on finance leases, was $32b billion for 2022 compared to $19.3b in 2021. 2022 capex was driven by investments in servers, data centers and network infrastructure. Meta forecasted 2023 capex to be between $30-33b down from their prior guidance of $34-37b. Similar to Google, management commentary around AI and capex was very telling on where the priorities lay.

Mark Zuckerberg, CEO

Now before getting into our product priorities, I want to discuss my management theme for 2023, which is the Year of Efficiency. We closed last year with some difficult layoffs and restructuring some teams. And when we did this, I said clearly that this was the beginning of our focus on efficiency and not the end. And since then, we have taken some additional steps, like working with our infrastructure team on how to deliver our roadmap while spending less on capex
And next, I want to give some updates on our priority areas. Our priorities haven’t changed since last year. The two major technological waves driving our roadmap are AI today and over the longer term, the metaverse.
AI, it’s the foundation of our discovery engine and our ads business. And we also think that it’s going to enable many new products and additional transformations in our apps. Generative AI is an extremely exciting new area with so many different applications. And one of my goals for Meta is to build on our research to become a leader in generative AI in addition to our leading work in recommendation AI.
Yes, I can start with generative AI. Yes, I think this is a really exciting area. And I mean, I’d say the two biggest themes that focused on for this year and one is efficiency and then the kind of the new product area is going to be the generative AI work.
A lot of the trends that we are seeing here is, we are using larger models, which require more computation. We have shifted the models from being more CPU-based to being GPU-based

There is a positive readthrough on Zuckerberg’s comment on the shift from CPU to GPU models. This could potentially benefit Nvidia and their H100 GPU.

Susan Li, CFO

Turning now to the capex outlook for 2023, we expect capital expenditures to be in the range of $30 billion to $33 billion, lowered from our prior estimate of $34 billion to $37 billion. The reduced outlook reflects our updated plans for lower data center construction spend in 2023 as we shift to a new data center architecture that is more cost efficient and can support both AI and non-AI workloads
So we’re shifting our data centers to a new architecture that can more efficiently support both AI and non-AI workloads. And that’s going to give us more optionality as we better understand our demand for AI over time. Additionally, we’re expecting that the new design will be cheaper and faster to build than previous data center architecture. Along with the new data center architecture, we’re going to optimize our approach to building data centers. So we have a new phased approach that allows us to build base plans with less initial capacity and less initial capital outlay, but then flex up future capacity quickly if needed. We’re still planning to grow AI capacity significantly, and that connects
The current surge in capex is really due to the building out of AI infrastructure, which we really began last year and are continuing into this year. We will be measuring the ROI of these AI investments, and their returns will continue to inform our future spend. Our intention is still to bring capex as a percent of revenue down, but capital intensity in the nearest term is really going to depend, in part, on the revenue outlook and our needs to further build AI capacity for future demand

Javier Olivan, COO

I think if you look at the strategy on ads, we really have two parts, which is continue investing in AI and that’s where we are seeing a lot of the improvement in ads relevance.

Microsoft:

For Microsoft FY 2022 capex, including assets acquired under financial leases, was $29.2 and compared $24.2 to FY 2021. For FY 2023, Microsoft has stated “… we expect a sequential decrease on a dollar basis with normal quarterly spend variability in the timing of our cloud infrastructure buildout.”

Satya Nadella – Chairman and Chief Executive Officer

The age of AI is upon us and Microsoft is powering it. We are witnessing non-linear improvements in capability of foundation models, which we are making available as platforms. And as customers select their cloud providers and invest in new workloads, we are well positioned to capture that opportunity as a leader in AI. We have the most powerful AI supercomputing infrastructure in the cloud. It’s being used by customers and partners like OpenAI to train state-of-the-art models and services, including ChatGPT.

Amazon:

For Amazon, capex including equipment financial leases, was $58.3b in 2022 compared to $55b in 2021. These expenditures primarily reflect investments in technology infrastructure. In the past, management has indicated that about 50% of total capex has gone toward infrastructure. Management gave no guidance for 2023 other that these investments will continue.

Conclusions

Per the most recent AMD earnings call:

In the most recent earnings report, Nvidia management commented that the H100 adoption rate and software monetization at the enterprise level is happening faster than expected. We will further outline how Nvidia is well positioned to benefit from this spending in AI and what to look for in Nvidia’s upcoming earnings report. We’ve recently covered AMD here.

Keep a look out for future posts.

Enphase Q4 Earnings: A Perfect 10

Posted on February 8, 2023June 30, 2026 by io-fund

Please note: the Product Road Map and Earnings Call information was updated on Wednesday, Feb 8th with the transcript.

I recently wrote there would be very few perfect earnings reports this quarter when we covered Tesla. Fast forward two weeks, and Enphase gave us a perfect earnings report this evening. The company beat on the top line, the bottom line, and expanded its margins.

When analysts tried to poke holes into a potentially weaker Q2, management said they were “cautiously optimistic” about Q2 with quite a bit of time dedicated to reasons California NEM 3.0 may not weigh on the results as much as anticipated. The reasons 2023 may be stronger than anticipated include United States manufacturing that results in IRA credits, Europe and Latin America growth, and California’s NEM 3.0 pushing residential toward batteries, which is a strength for Enphase.

Financials

The earnings report provided by Enphase is rare in this macro environment. The company beat and raised with expanding margins. Not only was it a beat and raise, but revenue growth is accelerating on a YoY basis (at least for now).

Revenue came in at $724.6 million for growth of 75.5% compared to 70% growth expected. For next quarter, the company is guiding to $700 to $740 million, above the $680 million analysts were expecting. At the midpoint, this will be 63.1% growth, which is nearly 10% higher growth than consensus of 54% for Q1.

On a year-over-year basis, this marks an acceleration from 2021 Q4’s growth rate of 55.8% and 2022 Q1’s growth rate of 46%. It’s quite a feat in the current market to accomplish this while growing the bottom line.

Notably, FY2022 revenue growth came in at 68.8% compared to revenue growth of 35.3% expected for FY2023. I’m sure we will see the FY2023 consensus updated soon to reflect the Q1 raise.

EPS beat with $1.51 reported compared to $1.26 expected. Margins were strong this quarter and are looking strong next quarter, per management guidance.

What remains in question is Q2 and there were many questions about this on the earnings call, which I will detail below when the transcript comes out. I do want to say there’s plenty on the product road map to offset a potential slowdown in United States residential. Yet, it’s prudent to weigh both sides and to be prepared if Q2 is “less strong” than Enphase investors are accustomed to.

Margins:

On a year-over-year basis, the margins are expanding. In some cases, the margins nearly doubled year-over-year.

GAAP Gross Margin of 42.9% compares to 39.5% in the year ago quarter. Adjusted gross margin also expanded by 350 basis points (bps).
GAAP Operating Margin of 21.6% compares to 14% in the year ago quarter. The adjusted operating margin expanded by 700 bps.
GAAP Net Margin of 21.2% compares to 12.7% in the year ago quarter. The adjusted net margin expanded by 440 bps.

Cash Flow:

Cash flow margins also increased both year-over-year and sequentially. Notably, Q4 is a stronger quarter seasonally than Q3.

Operating cash flow of $253.7 million for a margin of 35% up from 23.5% in the year ago quarter. This is also 650 bps higher than Q3.
Free cash flow of $237.3 million for a FCF margin of 32.7% up from 20.3% a year ago. This is also 450 bps higher than Q3.

The company has $1.61 billion in cash and $1.29 billion in debt. The company paid $77 million in stock based compensation.

Product Road Map:

· The third-generation battery will be released in North America and Australia in the second quarter. This is the battery that management is saying will support a softer landing from NEM 3.0 when analysts about California-related concerns. The battery has 5KW modularity and 2X the power of the existing battery. Due to this, management has stated “we expect our battery business to perform well in the second half of the year”

· EV chargers were discussed in the comments on the forum here. The IQ smart EV chargers will ship in the United States in Q2. There is also a new bidirectional charger on the product road map for early 2024. These bidirectional chargers can receive power from a residence or grid and also send power back to a residence or grid. Read more here. The battery storage also helps to keep vehicles powered in the event of an outage. The full roll-out for bi-directional is expected in January 2024.

· The much-anticipated IQ9 will be released in 2024. This release incorporates gallium nitride (GaN) for better thermal properties (resulting in higher power) and also a higher frequency.

· However, the 480 watt IQ8P will be released for the United States market in H2 2023. This will be warm-up for the IQ9 with more emphasis on IQ9.

· Manufacturing at Romania will start in Q1 2023 and will increase capacity to 6 million microinverters and then United States manufacturing will primarily increase the capacity to 10 million.

· Look for increased battery sales in Europe as the company is rolling this out now with limited battery availability in Europe prior to 2023 (mainly microinverters in Europe until now).

Earnings Call:

There were quite a few questions about the upcoming Q2 quarter, and any potential weakness from NEM 3.0 and also the United States residential solar market. We outlined what the initial concerns were in our last earnings write-up found here.

Also, please note, the CEO can be a bit long winded at times, and this leads to the longest earnings calls that I personally cover. I’ll try to take out the most pertinent excerpts. To read full responses, please reference the transcript here.

California is 20% of Revenue

The United States makes up 71% of Enphase's revenue. Certainly, it's important to pay attention to any U.S. slowdown. However, outside of California's potential Q2 pull forward, Enphase has been able to beat and raise in light of analyst notes predicting the slowdown would impact growth in Q1.

The information below is important if we do see a slowdown from NEM 3.0. The question that remains is if battery sales will pick up to help offset any impact, if Europe will pick up and/or carry the growth should there be any impact (this region is carrying the growth for Q1 to the point of a 10% raise on revenue), and when the market will begin to price in a better bottom line from IRA credits. NEM 3.0 seems to be the main obstacle in Enphase’s path so I want to start here.

“Ameet Thakkar

Great. Thanks for that. And then I think this time last year when we had this call, and certainly a battery kind of uptake in California will increase, and that might change things. But I think you guys said that like California was roughly 20% of total revenues post the initial NEM 3.0 proposal. I was just wondering if you could kind of give us kind of a refresh on where ‘22 ended up in terms of California as a percent of total revenues.

Badri Kothandaraman

Those numbers are right. Yes. California, the revenue is approximately 20% of our total revenue. That’s correct.

Ameet Thakkar

And it’s still 20% in ‘22?”

Cautiously Optimistic About Q2 and Discussions on Why NEM 3.0 Will Encourage More Batteries:

This is what the CEO said about Q2 in the opening remarks:

“There are a couple of interesting observations I thought I will share with you. Even with the pronounced seasonality and sell-through in January, we would like to point out that our activations are holding up. The second point to also note is that in conversations with our installers and distributor partners, they have started to see originations pickup in January when compared to December. Although the data we have is limited, these two points make us cautiously optimistic about Q2. We have also seen some analyst reports about a possible shift from loans to PPA due to the high prevailing interest rates. We work with thousands of installers every quarter […]. Any shift from one type of financing to another only has a minor impact to our business, almost negligible.”

Here was one of the questions:

Brian Lee:

“Hey, guys. Good afternoon. Thanks for taking the questions. Kudos on the solid execution. First question I had was just around NEM 3.0. I think there is different implications of that policy uncertainty near term and medium term from what we’re hearing. So maybe just wanted to get your thoughts near-term, some views out there that maybe there is a pull forward on demand in California would be curious what you’re seeing with respect to that? And then kind of in the medium term, we’re hearing the industry is still maybe trying to figure out how to navigate this.

So curious how you specifically are thinking about the second half of 2023 in the U.S. you kind of base case in California to be down significantly? And then how do you see yourself navigating that, if that’s the case? Are you driving more product to other states, focusing more in Europe? Just curious just how you’d be thinking about planning into that period of higher policy uncertainty in the back half? And then I had a follow-up.”

Badri Kothandaraman

Yes. On NEM 3.0, we aren’t really seeing any pull forward right now. But in talks with few installers in California, both big and small, like what I said, the originations are up strongly. They are all quite optimistic. And maybe we will see something soon that’s why I talked about an optimistic Q2. But so far, we haven’t seen any pull forward demand yet.

Now on talking about NEM 3.0 in general. NEM 3.0 is going to be incredibly positive for us […] With NEM 3.0, it matters when you export these electrons. So you have 24 hours a day, 365 days a year. So basically, 8,760 data points, and there is an export rate for each of those data points. Each of those hours, there is an export rate. And – but what it works out to be is if you are interested in a pure solar system, your payback dropped understandably from, let’s say, 5 years, it increases actually to something like 7 or 7.5 years with the pure solar system. But the moment you add batteries, you can add batteries in steps of 5-kilowatt hour, 10-kilowatt hour, 15-kilowatt hour, the moment you add batteries, that payback comes right back in to that 5 to 6-year time, to that 5 to 6-year period. That is the stock difference with NEM 2.0. With NEM 2.0, the grid was the battery. Batteries didn’t have an ROI because batteries were primarily for resilience only. With NEM 3.0, batteries are going to be financially attractive. […] We got the right batteries for it with the third-generation battery. We got the modularity, which I think will start becoming popular. Grid tied may become popular, but we will be ready to do either grid tied or off grid, on grid with backup.”

The Comment About the United States Slowdown:

Here was the comment about the United States slowdown:

“Normally, we have 6-month order visibility and that has been – that is now somewhat reduced as they watch their spending. And then I also talked about the fact that our sell-through, which is what the distributors sell to the installers. Our sell-through was quite strong in December, while we saw a little bit more seasonality than normal in the month of January.”

Here is a longer discussion, which points toward Enphase not counting on the U.S driving the growth, rather it was stated and discussed a few times, growth will come from Europe and a bit from LatAm.

“Badri Kothandaraman

Yes. I mean, look, seasonality has always existed in the solar industry from Q4 to Q1. And historically, I would say that, that seasonality is a 15% number. That means, in general, the sell-through in Q1 is usually 15% down compared to the sell-through in Q4. Now right now, and I’m giving you a lot of data from January, and that’s the data we have. Our Q4 was very strong, including December. January, we start to experience a little more than 15%. That’s why I said more pronounced seasonality. And of course, we think it is due to the macroeconomic environment, but what we saw interestingly was the activations remain the same. I mean approximately and they were a little bit down they didn’t have that much of a seasonality. So that basically was somewhat good because the customer demand at least whatever we saw was – I mean, did not get that much affected. But having said that, I think the installers are quite cautious. Therefore, they basically are only buying what they need from their distributors, which is a stark difference from 2022, where they were focused on supply. They were focused on maximizing what they had in their warehouse. Now is that they are worried about their spending, they are worried about their OpEx, they are worried about their cash flow. Therefore, they are going to make sure they do exactly what is required. So that’s why I think – and I don’t have a crystal ball. I cannot be sure. That’s why I think we are seeing some customers who used to book 6, 9 months ahead, now will not book so much ahead. They will be a little more conservative.

And regarding your question on more – that the originations, whether they are improving or not, this is the data. We work with thousands of installers. We have a very strong sample set. We talked to a lot of distributors. Some of our distributors service hundreds of long tail installers. So we don’t see originations ourselves. We only – what I reported to you is anecdotal information. But we hear that originations and especially originations in California are back to being strong in January. That’s what we hear. And I think that is – that’s why I said that – plus the fact that we are not seeing that much of a link in activation points me to cautiously optimistic Q2 versus Q1.”

Europe is a Primary Growth Driver:

As discussed on the call, the United States is expected to decline between Q4 to Q1.

“Let’s now cover the U.S. We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment. We are seeing that our distributor and installer partners are a little more cautious in booking orders. We normally have a 6-month order visibility and that has been somewhat reduced as our partners watch their spending closely. On the sell-through of our microinverters, while December was quite strong for us we saw a more pronounced seasonality in January than normal.”

For Europe, the company is expecting: “As for Q1, we expect healthy growth compared to Q4, consistent with the overall growth in the European market.” This will be driven by expanding to more countries for the IQ8 microinverters and increased battery sales.

Additional Quotes on the Europe’s Geo Strength:

“Well, as you said, we do not guide something annually, but European market is growing. At least our internal reports talk about served available solar market of about 13 gigawatts in 2023. The markets to really – the markets that are really driving are Netherlands, Germany, Spain, France, Italy, and even actually Austria, Poland, etcetera. They are all becoming quite significant markets. In addition, attach – battery attach is also growing. Like what I have stated in the prior question – answering the prior question, the attach rate on batteries in Germany is 80%. So, solar plus storage is growing healthily. And the geopolitical situation accelerated it last year, and that’s continuing what do – that’s what our position is […]”

Jeff Osborne

Hi. Good afternoon Badri. I have two quick ones. You touched a lot on Europe, but I was wondering if you can specifically drill down on the visibility you have there in terms of Q1 and Q2.

Badri Kothandaraman

Yes. Europe is actually the opposite. We do have good visibility. We do have these strong orders. Partners, our installer partners, distributor partners, they rely on us for supply. A few of them even come to our headquarters quite routinely, that’s something that we are starting to see. And we also visit them quite a bit. So, I think we do have decent visibility there.

Perhaps Most Importantly, Europe was hinted as the primary driver for reaching the 90% IQ8 Microinverter mix:

“Ameet Thakkar

Good afternoon Badri. Thanks for squeezing me in. Just I guess a follow-up on that last line of questioning. But I think you guys have targeted to get to 90% in terms of IQ8 mix by the end of the second quarter, I think you just said 60% is kind of what’s baked in for the first quarter. Are you guys running a little bit behind on that?

Badri Kothandaraman

We are running a little behind, I would say. I would – I am going to – or rather we are going to introduce IQ8 into several countries in Europe in the near-term. So, in Q2, we will probably be at maybe a little lower than 80%. And I think in Q3, we should probably catch up to that 90%.”

Manufacturing Capacity & IRA Credits:

In the opening remarks, this is what was stated about manufacturing in the United States:

“We plan to begin U.S. manufacturing of our microinverters in the second quarter of 2023 with a new contract manufacturing partner and in the second half of 2023 with our two existing contract manufacturing partners. We plan to open 6 manufacturing lines by the end of this year adding a quarterly capacity of 4.5 million microinverters, bringing our total quarterly capacity to more than 10 million microinverters as we exit 2023.We continue to await the details of IRA implementation from the U.S. Department of Treasury.”

In regards to the benefit from IRA, the company is expecting the following:

“Badri Kothandaraman

Yes. I mean net-net, we expect a net benefit of between $20 and $30 a unit. I am giving you a wide range right now because we do have some puts and takes, and we will refine it as we go.”

Back of the napkin math puts this at a $500 million net benefit to Enphase once the credits roll-out. They do say it’ll take time, but that’ll help an already strong bottom line while other companies struggle to maintain profitable during a macro slowdown.

Conclusion:

Articles like this one aren’t very meaningful considering Enphase raised Q1 guidance by 10% in light of a United States slowdown. This is being achieved through international sales, such as Europe and Latin America.

My takeaway was that even with a “less than perfect” Q2, the manufacturing credits coming from IRA, as well as the product road map, will offset this by year end. The CEO did state “they are fully booked for Q1” and “bullish about 2023.” This leads me to believe a softer United States market is being accounted for in the Q1 guide – and I hope the same will happen come Q2 or soon after – which is that the U.S. market isn’t the thesis right now anyways except for the IRA credits.

I believe the IRA credits shouldn’t be underestimated in terms of impact, and we are comfortable riding the wave of Q2 given the company’s ability to overcome many macro obstacles, thus far. We are looking for strong bottom lines and resiliency in a tough macro, and Enphase ticks those boxes.

Additional Analyst Commentary:

I’m starting with the bearish comments first, but per usual, it seems the bearish analysts were on a different earnings call than the bullish analysts as they are taking exact opposite positions on the same information. As you know, I’m in the bullish camp for three main reasons:

1. The resiliency of this company in 2022 and going into Q1 2023 is rare, and I suspect they have what it takes to continue on this path. No major flags although there’s a question mark on 20% of revenue and how a decrease in microinverters will impact the company compared to an increase in storage.

2. The European segment is clearly carrying the company and seems poised to continue doing so per the sequential decline in the United States, yet raise on revenue growth (we have +10% at the midpoint, analyst below has +7% — analyst below likely referring to their estimate)

3. Strong product road map, a few catalysts and any one of them can absorb a limited impact to 20% of revenue. Strong bottom line with clear information on this improving with or without a recession.

“Barclays analyst Christine Cho raised the firm's price target on Enphase Energy to $257 from $251 and keeps an Equal Weight rating on the shares following the "solid" quarter. While Enphase ended 2022 on a high note, microinverter shipments will slow as installers remain cautious in a tougher macro tape with inventory channels already at healthy levels, the analyst tells investors in a research note.”

“Susquehanna analyst Biju Perincheril lowered the firm's price target on Enphase Energy to $275 from $365 and keeps a Neutral rating on the shares. The analyst said they beat on the top and bottom line but demand within the US is becoming more uncertain as macroeconomic concerns are causing installers to purchase only what they need right now rather than to secure future supply.”

“Cowen analyst Jeffrey Osborne raised the firm's price target on Enphase Energy to $341 from $335 and keeps an Outperform rating on the shares. The analyst said its Q4 EPS upside was driven by gross margin strength attributed to IQ8 penetration. Q1 revenue guidance is 7% above consensus at the midpoint with the U.S. expected to decline QoQ on seasonality with management optimistic U.S. will rebound in 2Q23.”

“Oppenheimer analyst Colin Rusch raised the firm's price target on Enphase Energy to $328 from $323 and keeps an Outperform rating on the shares. With Enphase beating Q4 expectations and guiding ahead of the Street, the firm believes bearish investors will focus on slower battery sales in Q1 2023 and risk to the CA demand post NEM 3.0, but notes both set Enphase up for accelerating growth through 2023. Oppenheimer continues to see U.S. residential solar demand as more resilient than feared and believes Enphase is making sound changes to its battery and commercial rooftop products while being poised to enjoy 500-800bps-plus margin improvement from U.S. manufacturing credits.”

“Craig-Hallum analyst Eric Stine lowered the firm's price target on Enphase Energy to $315 from $323 and keeps a Buy rating on the shares. The firm notes Enphase reported a beat across the board in Q4 and guided Q1 2023 above the Street, with it fully booked and Europe a primary driver. While the Q1 guide does call for revenues down modestly quarter-over-quarter at the midpoint, Craig-Hallum thinks that Enphase's plan to more than double its capacity by the end of 2023 shows the true growth path and outlook, and with the majority of this expansion in the U.S., it also means substantial incremental EBITDA from the 45-times Advanced Manufacturing Tax Credit.”

Bitcoin is up 40% in 2023, Here’s Where it Goes Next

Posted on February 8, 2023June 30, 2026 by io-fund

Two months ago, we announced that we are buying Bitcoin in the analysis: “Bitcoin is Going to Rally Again, Here’s What you Need to Know.

Here is what we said on December 9th:

“Though we are in the 4th bear cycle in Bitcoin's history, the prior 3 cycles suggest where we are is a rare buying opportunity. There is ample evidence to support the $15,500 level is either a major low or very close to a major low. Both the technical and on-chain analysis support this.”

Due to technical analysis coupled with the on-chain analysis provided by WealthUmbrella, it became evident that we were at a major low and we alerted our followers to this important moment. Since then, Bitcoin is up 40%, and we view the next correction as potentially another moment when we may add to our position. When we add to our positions, we issue real-time trade alerts plus position sizing for our research members. Our firm is known to navigate Bitcoin’s volatility particularly well even in challenging markets.

Below, we update the new developments in Bitcoin’s price patterns as well as the on-chain metrics that we tend to see around historic lows. We will also take a look at the fundamental thesis surrounding Bitcoin’s utility, and why a globally indebted economy coupled with structural inflation will only benefit from Bitcoin.

Our first sign of this problem happened when the Bank of England abandoned its fight against inflation to support its currency. This was recently followed when we saw signs that the Bank of Japan could potentially lose control of its bond market, as they started bending to inflationary pressures. It appears that central banks are being boxed into a winless corner where they have to choose between fighting inflation or causing a fiscal spiral in their economies. As these problems grow, Bitcoin’s alternative to centralized fiat system will become more attractive, which I believe is showing up in the price action.

The Bank of Japan, Inflation and Bitcoin

Last month, the Bank of Japan (BoJ) surprised markets by widening their 10-year treasury bond from 0.25% to 0.50%. This may seem small, but this move roiled markets and sent ripple effects across asset classes globally, The reason the change in bond yields had a strong effect is because Japan has excessive public debt, and the concern is it will cost more for Japan to now service this debt.

Most countries are dealing with high levels of debt due to a decade of negative to zero rates. However, Japan’s debt is one of the worst globally with a debt-to-GDP ratio of 262.5%. Like most central banks coming out of the Great Financial Crisis, The Bank of Japan embarked on a series of programs to combat deflationary forces. Unlike most economies, Japan’s rapidly declining population, amongst other factors, had their central banks combating deflationary forces that most of the world did not have to address.

As a result, Japan decided to take central bank engineering one step farther. They set a goal of reaching a 2% CPI at any cost. So, they announced a new Yield Curve Control (YCC) policy. In order to maintain a yield below where the market would naturally price it, the BoJ had to sacrifice their balance sheet to achieve this goal. In brief, any bond that traded over their target, they bought.

One of the by-products of artificially low rates in countries that issued public debt in their own currency was a very high public debt-to-GDP ratio. With rates at a persistently low level, governments were encouraged to borrow under the assumption that inflation will likely always be under control.

What this means is that Japan, as well as other countries with high Debt-to-GDP ratios, cannot tolerate higher yields. The higher the yields, the more it will cost the Japanese government to service these debts. If they go too high, then the Japanese government runs the risk of defaulting on their loans.

This is not a problem as long as inflation is subdued. However, like the rest of the world, Japan is now dealing with a high CPI around 3.7%, which is much higher than their target.

So now, they appear to be approaching the end-game scenario. They have to combat inflation by raising rates, but if they raise too high, the bond market will lose confidence in Japanese debt. This is what happened in England last year when the new administration announced a sweeping spending bill coupled with tax credits in the face of a growing energy problem. In short, the bond market stopped playing ball. As debt got sold and yields climbed, this left the Bank of England no choice but to once again become the buyer of last resort, while having to deal with high inflation at the same time.

If the 3rd largest economy in the world, and second most important currency loses control of its bond market, the Bank of Japan could become one of the biggest stories in 2023. How does this tie into Bitcoin? Bitcoin is viewed as an alternative to the centralized fiat money system. Because it is not centralized, it is not prone to the results of monetary manipulation and corruption. Bitcoin is an easy and secure way out of a country’s fiat system, for better or worse.

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Whether one agrees or not is irrelevant. The perception that Bitcoin is an alternative is what matters, just as the perception that gold is an alternative is important, as well. The more problems that unfold with the inevitable crumbling of the global fiat money system in light of systemic inflation, the more a country will likely adopt it.

We see a definite correlation between corruption and crypto adoption. This is a correlation that has persisted for years.

The reason for this correlation is because with systemic corruption comes economic hardship, heightened inflation, and in some instances, hyper-inflation. Prior to Bitcoin, citizens have historically had no convenient way out of their country’s currency, so they have been trapped.

Not all economic hardship is the result of corruption. We’ve seen global central banks embark on the greatest monetary experiment in human history, marked with countless policy errors and questionable decisions. In the U.S., we see a clear correlation between the strength of the U.S. Dollar and Bitcoin.

When the dollar is weak, or we see the FOMC flinch in light of needing to tighten, Bitcoin catches a bid. So, clear correlations and utilities are being developed with Bitcoin that lines up with the monetary issues unfolding. We only expect this relationship to strengthen into 2023 and beyond. Structural inflation is likely here to stay, which means that global central banks will inevitably follow Japan in Yield Curve Control programs to prevent a fiscal spiral. There is simply too much debt in the system, and not enough buyers of new issues. This will only improve Bitcoin’s attractiveness.

On-Chain Analysis

Bitcoin does not have earnings reports. You cannot do classic fundamental analysis on this asset to help determine underlying strength. For this reason, crypto has been leaning on technical analysis predominantly, until recently. Some researchers have uncovered that Bitcoin offers its own unique form of fundamental data found on the public blockchain. This data, called on-chain data, allows us to track several patterns that can provide clues to major turning points. The following data was provided by Vincent Duchaine of WealthUmbrella, whose company has developed an automated algoriths to help retail investors navigate risk-on and risk-off environments.

In the previous article, we noted that various on-chain indicators indicated that a bottom was likely.

“Overall, most on-chain metrics from any layers of the Bitcoin ecosystem is providing rare readings that tend to flash around major bottoms.”

Specifically, the indicators tracking money flow into and out of exchanges saw a peak in June 2022, which was the third highest recorded in bitcoin history. Despite the FTX incident in November, this indicator was forming a lower high, which suggested that fear was fading.

Additionally, Bitcoin’s price was within a range that we rarely see, and has historically marked major lows. What the below range is measuring is the relationship between Bitcoin’s market cap (price x the number of coins in existence) and its thermos cap (price of each coin when it was last purchased x the number of coins in existence). Bitcoin’s price was in the middle of our “value-zone” that has marked larger turning points in the past.

Further evidence that a new bull cycle is developing can be seen with the Spent Output Profit Ratio (SOPR). This is calculated by examining all daily transactions on the Bitcoin blockchain and determining if the coins were exchanged at a profit or loss based on the price at the last time they moved. A ratio of 1 indicates that all bitcoins moved on a given day were sold at the same price as they were bought. A ratio over 1 means that on average people sold at a profit, and under 1 means at a loss.

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The SOPR signal can be noisy on a day-to-day basis, but when filtered correctly, it can be a good indicator of the current market phase. It can prematurely signal a top and may lag in signaling a new uptrend. As of last week, this signal flipped positive, and it is worth noting that it has not given any false signals throughout the history of bitcoin, despite sometimes being late in calling an event.

The above analysis is only a handful of metrics used to improve our odds at catching a new bull cycle. The final piece of evidence will come from the developing price pattern from the 2022 low. As of now, we only have 3 waves up off the recent low. We need this to get to one more high to complete the much anticipated 5 wave pattern that tends to mark a bigger trend reversal. If we do get that last push higher, the following pullback will be where we add to our position.

In conclusion, our multifaceted analysis into Bitcoin is supporting the likelihood of a larger trend reversal. This is not confirmed from our end until we see price make that last high in the coming weeks towards the $25,600 region. Interestingly, this new bull cycle is coinciding with a weakening US Dollar. Also, it is accompanied with more central banks being boxed into inescapable corners. Structural inflation is likely here to stay, and it will not be easy for indebted country’s to control this.

This will only lend support to Bitcoin’s original thesis that there is no need for the trusted middle man within a peer-to-peer transaction. Centralizing our monetary system allows for corruption, and policy mistakes that can, and do, lead to 2008-style events. The deeper we go into the Central Bank monetary experiment, the more apparent it is this idea has become 15 years later.

This Thursday, 2/9/23, at 4:30 pm EST we will host our weekly webinar where we go through various broad market charts, as well as individual tech stocks we are targeting for entry and exits. We also provide a weekly update into Bitcoin that will help our premium members better manage risk. An example of this is when we put out an alert to sell Bitcoin when it topped last March (behind paywall) with some discussion on social media leading up to this trade alert. I/O Fund provides real-time trade alerts and an audited, actively managed portfolio. Learn more here.

AMD Q4 Earnings: Mixed Report that Points Toward H2 Rebound

Posted on February 2, 2023June 30, 2026 by io-fund

Objectively, AMD had a mixed report. There are no serious red flags, per se, and the report was a bit better than Microsoft as management gave investors something to look forward to. Management sounded confident (or even adamant) there would be a H2 rebound in the data center and a Q2 rebound on PCs.

Certainly, the report wasn’t a disaster like Intel, and that comparative performance is likely helping AMD with flat price action despite there being some puts and takes.

Where the report was mixed is the weaker-than-expected data center sequential growth and lower gross margin. Investors will need to trust management has enough visibility into H2 to deliver. It’s helpful TSM echoed the same, which is a H2 rebound. However, the current information provided for next quarter is double digit deceleration sequentially in the data center due to high inventory levels.

We remain positive on AMD but want to be a good messenger on the nuances of the earnings report.

Financials:

AMD reported inline with expectations for Q4. There was a slight beat on revenue at $5.52 billion expected compared to $5.6 billion actual. This represented growth of 16% compared to growth of 14.3% expected.

The March quarter guide missed, and this is where analysts on the earnings call were primarily focused. Guidance of $5.3 billion missed by expectations of $5.52 billion, which equals growth of (10%) compared to (6.3%) expected. Please read the Earnings Call Notes below, as it required further discussion to put the pieces together. Prior to Xilinx, GAAP tracked about 1 point within the Non-GAAP margins.

The inline Q4 resulted in the FY2022 also being in line for growth of 44% and revenue of $23.6B.

GAAP Margins are not the best to focus on right now as they include the amortization of Xilinx assets and intangibles. Rather, for YoY comparison, the adjusted margins are a better indication of AMD’s business operations.

Q4 Margins:

Adjusted Gross Margin of 51% compares to Adjusted GM of 50% in the year ago quarter and 50% in Q3
Adjusted operating margin of 23% compares to 27% a year ago, analysts were concerned about this
Adjusted net margin of 19.6% compares to 23% a year ago, analysts were concerned about this

FY 2022 Margins:

Same as above, the GAAP margins aren’t reflective of the business operations due to the Xilinx acquisition.

Adjusted Gross Margin of 52% for gross profit of $12.273B
Adjusted operating margin of 27% for operating profit of $6.345B
Adjusted net margin of 23.3% for profit of $5.5 billion

Cash Flow:

AMD reported lower than usual cash flow in Q4:

Operating cash flow of $567 million, for a margin of 10% compared to a margin of 17% a year ago and 17% last quarter
Free cash flow of $443 million, for a margin of 7.90% compared to FCF of 15% a year ago and FCF of 15% last quarter

For Fiscal Year 2022, cash flow:

Operating cash flow of $3.6 billion for a margin of 15.2%
Free cash flow of $3.1 billion for a margin of 13%

The company repurchased $250M shares this quarter. There is $2.3 billion in cash on the balance sheet and $330 million in debt.

Revenue Segments:

The data center was up 42% YoY for $1.7B in revenue. This is $1 billion higher than the previous quarter for 6% QoQ growth. As stated above, the issue is the miss on Q1. It was vague in the quarterly report yet was indicated on the call that data center would be down “double digits” sequentially due to high inventory levels. However, management had positive things to say about H2 and the data center.

Client revenue of $903 million was down (51%) YoY and down (9.7%) sequentially. It was indicated on the call that client revenue would be down single digits in Q1 and this would mark the bottom, according to management. There was a reported operating income loss of ($152) million.

Gaming revenue of $1.6 billion was down (7%) YoY and flat sequentially.

Embedded revenue of $1.4 billion was up 1,868% YoY due to the Xilinx acquisition and was up 7.6% QoQ.

Earnings Call:

The first hint of some data center weakness in Q1 was in this information provided by the new CFO, Jean Hu:

“Year-over-year Data Center and Embedded segment revenue are expected to grow, offset by lower Client and Gaming segment revenue. Sequentially, Embedded segment revenue is expected to increase. Client and Gaming segment revenue are expected to decline largely consistent with seasonality. Data Center segment revenue is expected to decline due to elevated levels of inventory with some cloud customers.”

Despite not guiding for full year 2023, the CFO added:

“Directionally, we expect Embedded and Data Center annual revenue to grow from 2022 based on the strength of our product portfolio and expected share gains. In addition, we expect Client and the Gaming segment revenue to decline based on the current demand environment.”

This was followed by a question later on by Ross Seymore:

“So just trying to get the magnitude of just how much Data Center has to drop to make that outcome on the mix side be true.”

Lisa Su:

“Sure, Ross. So let's see. We said the Client and Gaming segments would be seasonal. So you would expect that the Data Center would be more than seasonal. So maybe to help you size that, think about the Data Center sequential drop as double digit, whereas the Client and the Gaming segments are more like single digit, if that helps.”

The bulk of the call was dedicated to dissecting the data center segment with some additional questions on gross margin and the Client segment/PCs.

Right out the gate, an analyst asked what is on everyone’s mind:

“But I've gotten about a zillion versions of the same question tonight, which was do you think the company can grow for the year 2023 overall? And if you could just kind of walk us through the drivers of the business as we work through the year? Thanks.”

The CEO answered with the following, indicating that data center would be a growth driver with emebedded:

“As we mentioned in the prepared remarks, coming off of a very strong 2022, there is some inventory at some of the cloud customers. And so, we are expecting a softer first half and then a stronger second half, but we feel very good about our market share position and opportunity to grow with Data Center.

Also on the embedded side, I would say we have a very strong portfolio there. The Xilinx business has done very well in 2022. It's a diversified set of markets. We see strength in a number of the end markets. And so, we think that's also a grower for AMD.

On the other side, our Client and Gaming businesses, we believe, will decline. We have made good progress. When we look at the PC markets in the second half of the year of 2022, we were really trying to rebalance inventory.”

That was the first of many times management clarified that the data center would grow in H2. Here were a few other times:

“Our expectation is that sort of the first half softness for cloud and then second half strength as that's worked through. But like I said, it's different for each customer. And then in terms of overall growth, as I said, we're very bullish on the overall growth of our Data Center business and the opportunity to gain share as we go through the year.”

Discussion on Q1 Being the Bottom for PCs:

Vivek Arya:

“But when we look at the shipments, right, from you and your competitor, they could be down as much as 40% or 50%, right, year-on-year in Q1. So do you think there's a possibility that the TAM assumption of just down 10% could be an optimistic one?”

Lisa Su:

“I think second quarter – first quarter should be the bottom for us in PCs. We – and then grow from there into the second quarter and then into the second half. And I should note also, Vivek, I mean, we just launched our Ryzen 7000 Series with sort of our AI capabilities, both from a notebook and desktop standpoint.”

There was more reiteration later by Lisa Su but she was hesitant to say if the H2 strength will result in YoY growth.

“I think our Data Center grow – growth in the second half versus first half, we expect that to be significantly stronger. As it relates to clients, we would also expect it to be stronger. Again, depending a bit on macro and sort of how the TAM actually evolves.

I think for the Embedded businesses, I would say that we expect to grow over the full year 2023 versus 2022. What we see right now is a fairly strong backlog and good visibility into the first half of the year. I'm not ready to say that Embedded will grow in the second half versus the first half, though, because we're coming off very strong growth already. And so I think those are the puts and takes.”

It was interesting to hear that AMD took market share on PCs as the narrative has been that Intel did due to aggressive pricing

Lisa Su:

“I would say that in general, the PC market share numbers are probably a bit noisy right now, just given all of the sell-in, sell-through and the inventory dynamics that are being worked through. Actually, in the fourth quarter, we believe we gained a little bit of share in the PC market.”

There was (yet) another question on PCs:

Mark Lapacis:

“And Lisa, correct me if I am wrong, I thought I heard you say in an answer to an earlier question that you expect the PC client, but just to grow into second quarter. So is that suggest that 1Q, you think is the bottom on the PC? And then I had a follow-up? Thank you.”

Lisa Su:

“We do believe the first quarter is the bottom for our PC market – for our PC business, and we'll see some growth in the second quarter and then a seasonally higher second half.”

Discussion on Adjusted Gross Margin Guide:

Management provided guidance of 50% on the adjusted gross margin which is 3% lower than the year ago quarter. Due to data center being down sequentially, the Q1 margin is expected to be lower than usual.

Matt Ramsay:

“But I kind of wanted to focus on the drivers of the longer-term margin that's down, I guess, three or four points from where you were a few quarters ago despite more mix of the revenue coming from Embedded and Data Center?”

Lisa Su:

“In terms of the sequential question that you had from Q4 to Q1, that's just a product of the mix. So with Data Center being lower sequentially that – that's that. We are also working through our client inventory clearing [..] And so as Jean said in the prepared remarks, we would expect margin expansion as we go into the second half with the growth in Data Center, Embedded and some normalization of the client business as well.”

Stacy Rasgon:

“Can you give us any idea like first half to second half? Or I mean just for the full year, do you think gross margins grow year-over-year from the 52% that you printed in 2022?”

Jean Hu:

“The major headwind we are facing is really Client side, which if you think about the gross margin in the first half of 2022 versus the first half of 2023, the major impact is from the client revenue, inventory correction, which impact the gross margin in the Client segment […] But overall, we feel pretty good. Once we normalize the Client segment, our gross margin will continue to expand.”

Conclusion:

We plan to see it through with AMD. I had just written in the Tesla write-up that we won’t get a perfect ER from any company this quarter, so investors will need to subjectively determine what they are willing to hold through and what will cause them to move to the sidelines.

We don’t have to wait too long as the Q2 guide on PCs should potentially clear some of the cloudy skies. From there, we will know from not only AMD but also from TSM, NVDA and others if the much-anticipated H2 rebound will be on time. It makes sense because the comps were low in Q3 from the initial PC miss and same for NVDA’s crypto miss.

If a picture is worth a thousand words, then this is why we plan to see it through with AMD. Notably, other semi industry analysts believe AMD’s true market share is in the mid-20s. We covered this here.

Source: Reuters

Notably, I had stated on the forum in the pre-ER report for AMD that I’m not expecting much from the company for Q1. We are looking at Q2 and beyond.

Look for Meta’s comments tomorrow on capex to potentially hurt AMD and NVDA stock if the rumors are true about a $2B pullback on capex spending. We covered this on the forum here. We aren’t too concerned as there’s only one path to build out the AI economy – which is data centers and eventually edge microdata centers. If not Meta, then other Big Tech players will step up. Meta is simply trying to keep up as there are many hyperscaler customers to consider.

AMD Q4 Earnings: Mixed Report that Points Toward H2 Rebound

Posted on February 1, 2023June 30, 2026 by io-fund

Certainly, the report wasn’t a disaster like Intel, and that comparative performance is likely helping AMD with flat price action despite there being some puts and takes.

We remain positive on AMD but want to be a good messenger on the nuances of the earnings report.

Financials:

The inline Q4 resulted in the FY2022 also being in line for growth of 44% and revenue of $23.6B.

Q4 Margins:

Adjusted Gross Margin of 51% compares to Adjusted GM of 50% in the year ago quarter and 50% in Q3
Adjusted operating margin of 23% compares to 27% a year ago, analysts were concerned about this
Adjusted net margin of 19.6% compares to 23% a year ago, analysts were concerned about this

FY 2022 Margins:

Same as above, the GAAP margins aren’t reflective of the business operations due to the Xilinx acquisition.

Adjusted Gross Margin of 52% for gross profit of $12.273B
Adjusted operating margin of 27% for operating profit of $6.345B
Adjusted net margin of 23.3% for profit of $5.5 billion

Cash Flow:

AMD reported lower than usual cash flow in Q4:

Operating cash flow of $567 million, for a margin of 10% compared to a margin of 17% a year ago and 17% last quarter
Free cash flow of $443 million, for a margin of 7.90% compared to FCF of 15% a year ago and FCF of 15% last quarter

For Fiscal Year 2022, cash flow:

Operating cash flow of $3.6 billion for a margin of 15.2%
Free cash flow of $3.1 billion for a margin of 13%

The company repurchased $250M shares this quarter. There is $2.3 billion in cash on the balance sheet and $330 million in debt.

Revenue Segments:

Gaming revenue of $1.6 billion was down (7%) YoY and flat sequentially.

Embedded revenue of $1.4 billion was up 1,868% YoY due to the Xilinx acquisition and was up 7.6% QoQ.

Earnings Call:

The first hint of some data center weakness in Q1 was in this information provided by the new CFO, Jean Hu:

Despite not guiding for full year 2023, the CFO added:

This was followed by a question later on by Ross Seymore:

“So just trying to get the magnitude of just how much Data Center has to drop to make that outcome on the mix side be true.”

Lisa Su:

The bulk of the call was dedicated to dissecting the data center segment with some additional questions on gross margin and the Client segment/PCs.

Right out the gate, an analyst asked what is on everyone’s mind:

The CEO answered with the following, indicating that data center would be a growth driver with emebedded:

That was the first of many times management clarified that the data center would grow in H2. Here were a few other times:

Discussion on Q1 Being the Bottom for PCs:

Vivek Arya:

Lisa Su:

There was more reiteration later by Lisa Su but she was hesitant to say if the H2 strength will result in YoY growth.

It was interesting to hear that AMD took market share on PCs as the narrative has been that Intel did due to aggressive pricing

Lisa Su:

There was (yet) another question on PCs:

Mark Lapacis:

Lisa Su:

“We do believe the first quarter is the bottom for our PC market – for our PC business, and we'll see some growth in the second quarter and then a seasonally higher second half.”

Discussion on Adjusted Gross Margin Guide:

Matt Ramsay:

Lisa Su:

Stacy Rasgon:

“Can you give us any idea like first half to second half? Or I mean just for the full year, do you think gross margins grow year-over-year from the 52% that you printed in 2022?”

Jean Hu:

Conclusion:

Source: Reuters

Notably, I had stated on the forum in the pre-ER report for AMD that I’m not expecting much from the company for Q1. We are looking at Q2 and beyond.