AMD will release its Q3 2024 results tomorrow. Analysts expect Q3 revenue to grow 15.8% YoY to $6.71 billion and adjusted EPS to grow 30.8% YoY to $0.92.
There are three primary growth segments for AMD. In data center CPUs, AMD has been a force to reckon with and continues to stomp on Intel. The most recent numbers for data center market share is at 34%, up from 4% in March of 2020 when our firm first predicted AMD was setting up for an epic comeback. The Turin EPYC processors were previewed in June and are expected to ramp with broad availability into the second half of the year.
Secondly, given Nvidia sparked an AI boom, the market is hyper focused on AI accelerators, and thus, there is outsized pressure on AMD to raise its revenue on MI300 GPUs. The Street whisper is that AMD will raise this number to $5 billion for this year (up from $4.5 billion), with some analysts predicting AMD will report $10 billion in GPU revenue next year. Regarding analyst expectations of $5 billion this year, this aligns with AMD’s commentary: “When you look at the second half we will continue to see Data Center to be the major driver of our top-line revenue growth” and expectations data center will grow sequentially. Last quarter, data center grew 115% year-over-year in Q2.
If we assume the $5 billion will be guided in tomorrow’s call, this equates to 19.5% of revenue this year, and if we assume the $10 billion materializes, it means AMD will end 2025 with 30% of the company’s revenue from AI. Management has already pointed out the MI300 series marks the fastest ramp in company history, and given they are sitting on tech’s second-best comeback of all time with EPYC processors, this is not a casual statement to make. For perspective, Broadcom will end this year with 23% in AI revenue, if we take their current fiscal year guide. Recently, AMD moved to an annual cadence for its GPUs with the MI325X expected to ship in Q4 2024 and MI350 expected in H2 2025.
Investors who own AMD are contending with market psychology around what it means to be second place in the highly competitive industry of tech. Additionally, AMD is known for undercutting on price, and thus, the MI300s are expected to be dilutive to margins, whereas Nvidia’s H100s and H200s have provide historic margins. Long-term, management has emphasized that GPUs will be accretive and above the corporate average (see paragraph below). With that said, for this report, AMD is expected to report an expansion in adjusted operating margins from 22% last quarter to 25% this quarter due to EPYC CPUs helping product mix. If reported, it will mark the highest adjusted operating margin in two years.
The third point to consider going into tomorrow’s report, is that it’s widely expected that client-facing semiconductor segments will be softer than expected this quarter. We’ve seen evidence of this in ASML, Texas Instruments and ON Semi. For AMD, this refers to the company’s PC exposure. We covered in the webinar the PC data the I/O Fund is closely tracking, which shows Q3 being meaningfully softer than expected, and that ultimately PCs will miss the 2024 estimates that industry analysts had going into this year. Last quarter, Client revenue was $1.492 billion, up 49% YoY and up 9% QoQ. Management stated at the time: “In summary, we delivered strong second quarter results and are well positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments.”
There is QoQ growth in PCs from Q2, yet within the industry estimates for Q3 across the PC industry, YoY is negative. AMD has a strong CFO (which helps with guiding correctly) and the company incrementally stronger than its peers on PCs. There is a scenario where AMD squeaks by unscathed by PC softness and its peers do not, as the company recently released the Zen 5 architecture including the Ryzen AI 300 laptops with a neural processing unit (NPU) with 50 TOPS of AI performance, and the Ryzen 9000 series for desktops. Management was positive about this upcoming quarter, stating to expect “above-typical seasonality given the strength of our product launches.”
Canalys has the most optimistic estimates for PCs, whereas IDC and Gartner are negative on a YoY basis at (-2.4%) and (-1.3%) respectively.
Revenue
Revenue is expected to accelerate in the coming quarters, driven by strong demand for data center CPUs and GPUs, coupled with the expected rebound in the Client segment.
- Analysts expect Q3 revenue to grow 15.8% YoY to $6.71 billion and accelerate to 22.3% in Q4. Revenue is expected to further accelerate to 33.5% in Q1 2025.
- Management revenue guide is $6.7 billion, representing YoY growth of 15.5% at the midpoint. This represents a 6.6-point acceleration from 8.9% growth to $5.84 billion in Q2.
Lisa Su said in the Q2 earnings call, “We delivered strong second quarter results and are well positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments. Our data center GPU business is on a steep growth trajectory as shipments ramp across an expanding set of customers. We're also seeing strong demand for our next generation Zen 5 EPYC and Ryzen processors that deliver leadership performance and efficiency in both data center and client workloads.”
- Analysts expect 2024 revenue to grow 12.9% YoY to $25.61 billion and accelerate to 28.3% growth in 2025.
- 2026 revenue is expected to grow 19.9% YoY to $39.38 billion.
Margins:
AMD’s margins are benefiting from a higher mix of data center revenue. This quarter is expected to report the highest adjusted operating margin in two years.
- Q2 gross margin was 49%, compared to 46% last year. Adjusted gross margin improved to 53% from 50% in the same period last year, helped by a higher portion of data center revenue. Management guide for Q3 is 53.5%, up from 51% in Q3 2023.
- Q2 adjusted operating margin was 22%, compared to 20% in the same period last year. Operating expenses increased 15% YoY to $1.8 billion due to higher R&D expenses required to address AI growth. Management guide for Q3 is 25%, up from 22% in Q3 2023.
- Q2 net income was $265 million or 5% of revenue compared to $27 million or 1% of revenue in Q2 2023. Adjusted net income was $1.13 billion or 19% of revenue compared to $948 million or 18% of revenue in the same period last year.
EPS
EPS is expected to grow significantly in the coming quarters.
- Analysts expect Q3 adjusted EPS to grow 30.8% YoY to $0.92, by 50.2% to $1.16 in Q4, and by 76.6% to $1.09 in Q1 2025.
- Analysts expect 2024 adjusted EPS to grow 27.9% YoY to $3.39 and accelerate to 59.7% growth to $5.41 in 2025.
- Analysts expect 2026 adjusted EPS to grow 36% YoY to $7.36.
Cash Flow and Balance Sheet
The company has increasing cash flows with room for improvement. At its peak in 2021, AMD reported over 25% cash flow margins.
- Q2 operating cash flow was $593 million or 10% of revenue compared to 7% in Q2 2023.
- Free cash flow was $439 million or 8% of revenue compared to 5% in Q2 2023.
- Inventories were $4.99 billion, compared to $4.65 billion in Q1. They were up primarily due to the continued ramp-up of a data center GPU product.
- Cash and short-term investments were $5.34 billion, and debt of $1.72 billion, compared to $6.04 billion and $2.47 billion in Q1. The company repaid $750 million in debt that matured in June with existing cash. It repurchased shares worth $352 million, with $5.2 billion of share authorization remaining.
- The company completed the Silo AI acquisition in August for about $665 million in cash. AMD also announced the acquisition of ZT Systems for $4.9 billion, which will close in the second half.
Segments
Data Center revenue grew 115% YoY and 21% QoQ to $2.83 billion. The company reported record data center revenue in Q2, accounting for 49% of revenue. The company witnessed strong demand for AMD Instinct GPUs and double-digit EPYC server revenue growth. Data Center is expected to continue to be a major driver of top-line growth in the second half of the year. Data Center’s operating margin was 26% compared to 11% in the same period last year.
Client segment revenue grew by 49% YoY and 9% QoQ to $1.49 billion. It was primarily helped by strong demand for Ryzen processors and initial shipments of the next-generation Zen 5 processors. The client segment is expected to grow sequentially in Q3, and management said in the Q2 earnings call that the customer response for the new Ryzen processors was strong, and it is expected to capture additional revenue market share (see below). Operating margin was 6% compared to (-7%) in the same period last year.
The gaming segment continues to struggle due to soft demand. Revenue declined by (-59%) YoY and (-30%) sequentially to $648 million. Management expects gaming segment revenue to decline double digits sequentially in Q3. “Semi-custom demand remains soft, as we are now in the fifth-year of the console cycle and we expect sales to be lower in the second half of the year compared to the first half.” The operating margin was 12% compared to 14% in Q2 2023.
Embedded segment revenue declined by (-41%) YoY and was up 2% sequentially to $861 million. Management observed initial signs of improving order trends and expect embedded revenue to gradually recover in the second half of the year, with revenue expected to be up sequentially in Q3. Operating margin was 40% compared to 52% in the same period last year.
Other Key Points
AI Revenue
AMD’s AI accelerator, the MI300, is the fastest-ramping product in AMD’s history. The company reported over $1 billion in MI300 revenue in Q2. Management expects MI300 revenue to ramp in Q3 and Q4. During Q2 results, the company raised the data center GPU guide from $4 billion to $4.5 billion for the year 2024. The company also cited in the earnings call that Microsoft was the first hyperscaler to announce the general availability of MI300X instances.
“Turning to our data center AI business, we delivered our third straight quarter of record data center GPU revenue with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X Accelerators to power GPT-4 Turbo and multiple co-pilot services including Microsoft 365 Chat, Word, and Teams. Microsoft also became the first large hyperscaler to announce general availability of public MI300X instances in the quarter.”
Strong Product Roadmap
The company announced earlier this year its expanded AMD Instinct accelerator roadmap and annual cadence for chip release. During the recent Advancing AI Event, the company also confirmed that MI325X chips are expected to be shipped in Q4 2024 and the launch of MI350 chips in the second half of next year.
Lisa Su said in the Q2 earnings call, “Looking ahead from a roadmap perspective, we are accelerating and expanding our Instinct roadmap to deliver an annual cadence of AI accelerators, starting with the launch of MI325X later this year. MI325X leverages the same infrastructure as MI300 and extends our generative AI performance leadership by offering twice the memory capacity and 1.3 times more peak compute performance than competitive offerings. We plan to follow MI325X with the MI350 series in 2025 based on the new CDNA 4 architecture, which is on track to deliver a 35x increase in performance compared to CDNA 3. And our MI400 series powered by the CDNA “Next” architecture is making great progress in development and is scheduled to launch in 2026.”
Lisa Su predicts that AI Data Center Accelerators TAM to reach $500 billion by 2028 growing at a CAGR of 60% from $45 billion in 2023, compared to the earlier prediction last December of reaching $400 billion in 2027. She also highlighted the strong MI300X performance during the Advancing AI Event. “If you look today at MI300x performance, we have more than doubled our inferencing performance and significantly improved our training performance on the most popular models. Today, over 1 million models run seamlessly out of the box on Instinct, and that's more than 3x the number when we launched in December.”
She further pointed out, “MI300X consistently outperforms the competition, which is H100 in inferencing. So, for example, using Llama 3.1 405B, which is one of the most newest and demanding models out there, MI300 outperforms H100 with the latest optimizations by up to 30% across a wide variety of use cases.”
I/O Fund note: It would be stronger to benchmark the MI300X against the H200s but the competition in releases is likely to become tighter with each generation. The MI325 is due out this quarter, and thus AMD is about two quarters behind Nvidia’s H200.
AI Software
AMD completed the acquisition of Silo AI in August. Silo AI specializes in large language model development, which will further enhance AMD's AI inference and training tools. The acquisition will also help to tap the talent pool of engineers and scientists of Silo AI who have used AMD hardware and provide customized AI solutions to its clients.
AMD announced in August that it would acquire ZT Systems for $4.9 billion. The deal is expected to boost data center AI solutions. Once the deal closes, AMD plans to sell the ZT Systems manufacturing business. The acquisition is expected to close in the first half of 2025 and be accretive on a non-GAAP basis by the end of 2025.
AI PCs and Zen 5 EPYC Processors
At the Advancing AI Event, Lisa Su discussed the success of EYPC CPUs since their launch in 2017. She pointed out that “EYPC has become the CPU of choice for the modern data center.” The cloud providers offer more than 950 EPYC instances, and on the enterprise side, larger server OEMS offer over 350 EPYC platforms, increasing the company’s server CPU market share to 34%.
Recently, AMD launched the 5th Gen AMD EYPC CPUs, formerly codenamed Turin. They are suited for cloud, enterprise, and AI use cases. They use the advanced 3nm/4nm process technology. The new Zen 5 core architecture, provides up to 17% better instructions per clock (IPC) for enterprise and cloud workloads and up to 37% higher IPC in AI and high-performance computing (HPC) compared to Zen 4 architecture.
During the Q2 earnings call, Lisa Su also said that the Client segment is also expected to do well in the second half of the year along with Data Center segment. It is expected to be above seasonal due to the launch of new products. The new Ryzen AI 300 laptops and the Ryzen 9000 series for desktops are powered by the 5th generation of the Zen architecture. The Ryzen AI 300 laptop has a XDNA 2 neural processing unit (NPU) that is designed for Microsoft Copilot+ AI software. This will deliver 50 TOPS of AI performance, exceeding Apple’s M4.
“We are launching Zen 5 desktops and notebooks with volume ramping in the third quarter. And that’s the primary reason that we see above-seasonal. The AI PC element is certainly 1 element of that, but there is just the overall refresh. Usually, desktop launches going into a third quarter are good for us, and we feel that the products are very well positioned. So those are the primary reasons.”
Note on GPU Margins:
It’s prudent to make a note that another area where AMD is not keeping pace with Nvidia is pricing power, leading to GPU margins that are currently below the corporate average. Here was a statement from management when questioned on the margins last quarter:
“Yes. On your second question about the profitability, first our team has done a tremendous job to ramp the product MI300. It is a very complex product. So we ramped it successfully. At the same time, the team also started to implement operational optimization to continue to improve gross margin. So we continue to see the gross margin improvement. Over time, in the longer term, we do believe gross margin will be accretive to corporate average.”
Valuation
The company trades at a P/E ratio of 185.5 and a forward P/E ratio of 44.9.
P/S ratio is 11.5 compared to the five-year average of 8.6. The forward P/S is 10 and the 1-year forward is 7.8.
Conclusion
Fundamentally, AMD is quite strong due to the continued strength in CPUs, the ongoing growth in GPUs, and the expected rebound in the Client Segment. We feel AMD is a win-win for our portfolio. Should the company beat, we will participate. If the company misses or something more broad weighs on the company (such as tariffs on semiconductors) then we will gladly buy shares lower.
We like Lisa Su reiterating the 2027 time frame for a $400B TAM, and increasing the estimate to $500B the following year for 2028. We will match that timeline and say we hope to see AMD be a leader in the market and in our portfolio by 2027-2028. CDNA 4 architecture is due out in 2025-2026, and is the most likely catalyst that I see today to narrow the product road map with Nvidia.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article. Beth Kindig, Lead Tech Analyst, contributed to this article.
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