Every quarter, we objectively review our portfolio for our earnings kickoff webinar to determine the strongest and weakest stocks. AMD topped our fundamental checks going into this earnings season due to its expected YoY and QoQ acceleration. The company is expected to post annual revenue growth of 13% for FY2024, accelerating to 28% growth in FY2025.
On a quarterly basis, the upcoming quarter is expected to be the bottom, with growth of 6.8% for June, growth of 14% in the September quarter, with further acceleration into the December quarter at 23% and the March quarter at 33%.
The future looks bright as the Client segment is expected to stabilize and the data center segment is expected to do its thing. Where there’s a will, there’s a way, and AMD is slowly making cracks in Nvidia’s Empire. The single most important announcement this quarter across our portfolio companies was the announcement of AMD’s acquisition of Silo AI. AMD plans to hit Nvidia where it hurts, which can be summarized in two words: open source.open source.
I fully expect AMD’s data center potential to take time to materialize, for the market to go through periods of doubting the stock, and for that to create immense opportunity for our portfolio. Those who have been with us for a while know that we are an incredibly patient analyst team; in fact, we first called AMD an AI stock about 4.5 years ago and the company is only now reporting actual AI revenue for the first time 2024. Per our analysis AMD: 2020 Premium Research:
“Nvidia remains my top AI choice as there is a better moat with the developer platform CUDA (in my opinion). AMD is my second choice in artificial intelligence and I find it fortunate the selloff has given me a second opportunity to build a position at a reasonable valuation.”
I can’t tell you exactly when the stock performance will match it’s AI potential, but I am uniquely skilled at finding semiconductor bottoms. We are at a fundamental bottom for AMD, and I doubt we return to this low of growth for the company for a very long time.
Financials:
These numbers will be updated Tuesday night with a report hitting your inboxes after hours. For now, here’s a preview of what to expect:
Revenue:
Management guided for revenue of $5.7 billion +/- $300 million, for growth of 6.4% at the midpoint. Analyst consensus is for revenue of $5.72 billion for growth of 6.8%.
- September quarter is expected to report 14.1% for revenue of $6.6 billion.
- December quarter is expected to report 23.2% for revenue of $7.6 billion
- March quarter is expected to report 33% for revenue of $7.28 billion (December quarter is higher due to PC sales).
The rebound is also seen on a fiscal year basis where FY2023 reported growth of (3.9%) for revenue of $22.7 billion.
- FY2024 ending in December is expected to report growth of 12.6% for revenue of $25.5 billion
- FY2025 is expected to report growth of 27.6% for revenue of $32.6 billion
- FY2026 is expected to report growth of 18.4% for revenue of $38.6 billion
Key Segments:
Last quarter, AMD reported data center revenue of $2.34 billion, up 80% YoY and up 2.4% QoQ. The guide for GPUs was originally $2B coming into this year, and the company is now guiding for $4 billion. Per management: “Expect data center segment revenue to increase by double-digit percentage, primarily driven by the data center GPU ramp.”
Another key point is that AMD’s Client segment is expected to increase sequentially. Last quarter, Client reported $1.37 billion, which was up 85% YoY yet down 6% QoQ. This segment has seen nothing but bloodshed for many quarters. Consider that in 2022, AMD peaked at $2.8 billion in quarterly revenue for the Client segment. Management’s guidance communicates that last quarter was the bottom: “Client segment revenue to increase sequentially.” Client segment revenue to increase sequentially.” This is key for AMD’s price action as Client is too big of a hit to offset GPUs ramping.
Gaming continues to weigh on results, reporting $922 million last quarter. Per management: “Based on current demand signals, gaming revenue expected to decline by significant double-digit percentage sequentially.”
Embedded revenue of $846 million was down (46%) YoY and (20%) QoQ. This segment is tied to automotive weakness. Per management: "Given the current embedded market conditions, we're now expecting second quarter embedded segment revenue to be flat sequentially with a gradual recovery in the second half of the year."
Zooming out, this is what management stated to expect for FY2024: “Sequentially, we expect data center segment revenue to increase by double-digit percentage, primarily driven by the data center GPU ramp. Client segment revenue to increase. Embedded segment revenue to be flat. And in the Gaming segment, based on current demand signals, revenue to decline by significant double-digit percentage.”
EPS:
Last quarter, AMD reported adjusted EPS of $0.62 with consensus seeing adjusted EPS turning up from here; meaningfully so in late 2024 and early 2025. This quarter is expected to report $0.68 in adjusted EPS for growth of 17.4% YoY. Over the next two to three quarters, we will see nearly a doubling in adjusted EPS.
- September quarter is expected to report adjusted EPS of $0.94 for growth of 34.7% YoY.
- December quarter is expected to report adjusted EPS of $1.24 for growth of 60.4% YoY.
- March quarter is expected to report adjusted EPS of $1.15 for growth of 85.3% YoY.
Margins:
AMD’s gross margin last quarter was 47% versus Nvidia’s 78%. In 2022, before the AI boom, AMD’s gross margin was 45% versus Nvidia’s 65%. This is one of the reasons Nvidia has historically had a premium valuation. AMD undercuts Intel on price, and this is the strategy with Nvidia going forward, as well.
- AMD reported a gross margin of 47% last quarter.
- Management guided for adjusted gross margin of 53%, and if reported, will be a 100 bps improvement from last quarter. This will also mark the highest adjusted gross margin in two years. This will represent adjusted gross profits of $3.021 billion.
- Last quarter, AMD reported a GAAP operating margin of 1% for operating profits of $36 million. This is very low as AMD had a GAAP OM of 22% in FY2021.
- The adjusted operating margin guide is for 21%, which if reported, will be flat QoQ.
- Net margin last quarter was 2% for GAAP net profits of $123 million. We’ve seen up to a 26% GAAP net margin in FY2020.
- Adjusted net margin was 19% for adjusted net income of $1.01 billion.
Cash:
Last quarter, AMD reported $521 million in operating cash flow for a OCF margin of 10%. This was a nice 400 bps uptick from the previous quarter, which reported a 6% OCF margin. We’ve seen up to a 25% OCF margin for AMD in Q2 2021.
Last quarter, AMD reported free cash flow of $379 million for a FCF margin of 7%. The company has cash and short-term investments of $6.03 billion and debt of $2.46 billion.
Stock based compensation is 7% of revenue.
Silo AI Acquisition
We had stated on our most recent webinar that we want to give AMD the space to fill the very big shoes an Nvidia contender has to fill. A good example of AMD playing the long-game is the acquisition of Silo AI for $665 million. This is Europe’s largest AI-related acquisition, sizably larger than the acquisition of DeepMind by Google for $400 million in 2014.
The company is known for its pool of AI talent, with experience in training large language models on AMD Instinct GPUs. These custom, open source LLMs called Poro and Viking are multilingual and can be customized and applied to many end-markets. Poro is a 34 billion parameter model that is cross-lingual for Europe’s 24 official languages and offers AI sovereignty by allowing companies or countries to create proprietary models. Viking is a 7 billion parameter model and highlights Silo AI’s unique approach in developing smaller LLMs for Nordic languages. These low-resource languages lack large training data sets. There are also 13B and 33B parameter Viking models, but the point is to not have to use hundreds of billions of parameters or even trillion+ parameter models being developed by OpenAI and Deep Mind/Google’s Gemini. Instead, Silo AI rivals LLMs such as Mistral and Meta’s Llama in English, yet processes multiple Nordic languages and programming code.
The official announcement for the 7B Viking LLM provides a clear message on why Silo AI was acquired by AMD: “With a purpose-built software layer to train models on AMD, Silo AI and TurkuNLP possess unmatched experience with training on AMD at scale, having shown that their theoretical predictions for throughput scaling materialize in weak and strong scaling experiments. As one of the seminal initiatives on AMD GPUs, this shows how it’s possible to achieve good throughput on the AMD-based LUMI, training the models with their open source training framework and utilizing up to 4096 MI-250X GPUs simultaneously.”
Our original thesis on Nvidia centered around the CUDA moat. This moat is fully in tact today, and has helped Nvidia enjoy unrivaled pricing power. Silo AI greatly speeds up AMD’s open-source software effort, which is the critical piece to AMD’s strategy as CUDA is closed-source and proprietary.
As the Forbes article points out, Hugging Face has partnered with AMD to run AI models on Instinct GPUs. Meta and OpenAI have ordered AMD’s new GPUs. From there, these companies can also open source their frameworks and models to help speed up time to market for smaller teams.
These large R&D departments are sophisticated enough to circumvent CUDA and program custom silicon or program competing GPUs if the total cost of ownership (TCO) presents a compelling reason. AMD’s MI300s go for $15,000 and as low as $10,000 when sold in bulk. Meanwhile, Nvidia’s GPUs go for an average of $35,000.
I first covered this in March of 2020 when our analysis pointed out: “It’s estimated that for every $1.00 in Rome chip sales, Intel loses $2.25 on average in Intel Xeon SP sales. The savings are then deployed to buy more Rome chips, which can further depress Intel’s revenue.”$1.00 in Rome chip sales, Intel loses $2.25 on average in Intel Xeon SP sales. The savings are then deployed to buy more Rome chips, which can further depress Intel’s revenue.”
In the July of 2023 I/O Fund analysis: “AMD is Ready to Rival on AI Acceleration” it was pointed out:
“From there, AMD undercuts Intel on price, which becomes a virtuous cycle as driving down costs means more chips will be bought from AMD. […] In the past, AMD advertised up to 20% Capex savings compared to Intel based on Epyc processors delivering more performance from a single chip compared to Intel’s dual-processor powered by two CPUs. Big Tech has capex budgets into the tens of billions. Although it’s not specifically disclosed exactly how much goes toward AI acceleration, we know that Big Tech is driving forward Nvidia’s GPU sales at $8 billion per quarter or $35 billion to $40 billion per year.$8 billion per quarter or $35 billion to $40 billion per year.
Here is the thesis in a nutshell: If a competitor can deliver 20% savings on this kind of budget with similar performance, then it will turn heads. We can geek out all day long on the computing performance of Nvidia’s H100 GPU, however, if the MI300s drive down total cost of ownership through low unit pricing, better power efficiency and reducing the number of GPUs required, then hyperscalers will line up to support this.
What Google, Amazon, Microsoft, Meta and large enterprises want most of all is to build incredible AI systems but at a manageable cost. This goes back to the virtuous cycle. The more they save, the more they can build.”
As Big Tech becomes pressured over their capex spend, it will only be natural that AMD is evaluated as an option to help alleviate this massive AI infrastructure spend.
Conclusion:
The future is bright for AMD. This company has what it takes to make cracks in the Nvidia GPU data center Empire. For our purposes, we think AMD could take up to 20% market share of the GPU data center, although it would take up to a decade for this to materialize. We are basing this estimate on what AMD has achieved in gaming GPUs, and the market share dynamic 80/20 on data center CPUs with Intel.
Equally important, AMD is a frontrunner on the Client side for AI. The company spans both x86 and Arm architectures for AI devices, and has the Xilinx acquisition waiting in the wings once automotive heats up again.
In our webinar, we had stated that a great tech story should have financials to match. AMD ticks this box, as well, with a rebound into the second half of this year and early next year. You will get an update from us post-earnings that looks at the gritty details of the report. But let me emphasize well ahead of time that we are in no rush for AMD’s AI story to materialize, as our sights our firmly on the horizon.
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