AMD heads into its fiscal Q1 report with rather high expectations, after management raised FY2024 GPU revenue forecast by 75% last quarter to $3.5 billion plus. Earnings reports last week from Microsoft, Meta and Google reaffirmed a bullish outlook on AI infrastructure spending for 2024, with all three combining for at least $135 billion in capex this year, with management commentary signaling a bulk of that spend will go to data center infrastructure and GPUs.
Therefore, data center revenue and GPU commentary are in focus this report. Yet, it’s key to be objective, and to note for our Members that some analysts are toning down estimates on the data center. Given the channel checks that analysts can do on a company like AMD, the polarized nature of the commentary going into the print tomorrow is interesting. We include analyst commentary below.
As a reminder, just last quarter analysts were setting a very high bar with some pushing for a $6 billion GPU revenue guide for the full year. We are seeing as low as $4 billion and as high as $8 billion. This wide of a range on a key metric is highly unusual, — and investors should be aware, it’ll be nearly impossible for AMD to beat the high-end of the FY expectations for the data center in Q1.
Therefore, it’s important we come up with our own expectations, of sorts. Broadcom is in second place with $1.5B in AI revenue, or $6B annual run rate. Due to analysts muddying the water a bit here on what is reasonable for a Q1 discussion on the call tomorrow, I think a decent goal (and win) would be for AMD to have GPU revenue equal to 2023 data center revenue by the time we exit the year, which was $6B. This number is also in line with AVGO’s current AI revenue and is the midpoint of analyst estimates.
Revenue and EPS:
- Q1 revenue was guided to be $5.4 billion, +/- $300 million, for YoY growth of approximately 0.9% and a QoQ decline of (12.5%). Analysts are expecting slightly higher revenues of $5.45 billion for YoY growth of 1.9%. As you can see above, Q1 should mark the bottom with a strong ramp into Q1 of next year.
- Q1’s adjusted EPS is estimated to be $0.61, for YoY growth of 1.3%. Adjusted EPS growth is expected to accelerate to 90% by Q1 of next year.
Q2’s guide will be important to track. Susquehanna noted Monday, after lowering its price target, that it is “expecting in-line to slightly weaker guidance as Server/PC/XLNX/Gaming continue to weigh.” Q2 revenue is currently estimated to be $5.69 billion for YoY growth of 6.2%.
Key Segments:
Data Center: AMD guided for Q1 data center revenue to be approximately flat QoQ, implying revenues of $2.3 billion for YoY growth of ~77%. This is due to “a seasonal decline in server sales offset by a strong Data Center GPU ramp.”
Data center revenue, and more importantly, MI300 revenue is likely to be the most critical aspect of Q1’s report and Q2’s guide, as analysts are simultaneously resetting and increasing expectations for MI300 revenues in April. This will be discussed in more detail in the section “MI300 GPU Sales in Focus” below.
For the full year, management said “the largest incremental revenue opportunities are going to come from Data Center between both the server side gaining more share, and Data Center GPU side with the significant ramp up of our MI300.”
Client, Embedded, Gaming: AMD guided for Client, Embedded and Gaming segment sales to “decline sequentially, with semi-custom revenue expected to decline by a significant double-digit percentage.”
Margins:
Adjusted gross margin is guided to be 52% in Q1, a 120 bp QoQ expansion as data center mix increases.
Adjusted operating margin is expected to be 20%, a ~300 bp QoQ contraction and the lowest level in three quarters. However, data center operating margin has expanded significantly over the past two quarters, from 19.1% in Q3 to 29.2% in Q4. For context, DC generated $666 million in operating income in Q4, up 118% QoQ and the most of any of AMD’s segments.
CFO Jean Hu shed more light on both the trajectory of margins and DC margin in Q1 and the rest of the year:
“We guided the Q1, 120 basis points higher than Q4 sequentially, primarily because the higher Data Center contribution actually more than offset the decline of Embedded business in Q1. Going forward, the way to think about it is as you said is the major driver is going to be Data Center business is going to grow much faster than other segment. That mix change will help us to expand the gross margin nicely. I think you also are spot on, the Embedded coming back in second half, which will be a tailwind. With the Data Center GPU, we are at the very early stage of ramp. We are improving testing time yield and continue to expand gross margin and we expect to be accretive to corporate average. So, those are all the tailwinds coming in the second half. I would say the headwinds side continue to be in the first half where we see Embedded business not only Q1 we see sequential decline, Q2 probably are going to be sequentially flattish versus Q1.”higher Data Center contribution actually more than offset the decline of Embedded business in Q1. Going forward, the way to think about it is as you said is the major driver is going to be Data Center business is going to grow much faster than other segment. That mix change will help us to expand the gross margin nicely. I think you also are spot on, the Embedded coming back in second half, which will be a tailwind. With the Data Center GPU, we are at the very early stage of ramp. We are improving testing time yield and continue to expand gross margin and we expect to be accretive to corporate average. So, those are all the tailwinds coming in the second half. I would say the headwinds side continue to be in the first half where we see Embedded business not only Q1 we see sequential decline, Q2 probably are going to be sequentially flattish versus Q1.”
Cash and Debt:
AMD reported operating cash flow of $381 million in Q4 for a margin of 6.1%, and FY23 OCF was $1.67 billion for a 7.4% margin. Free cash flow was $242 million in Q4 for a margin of 4%, and FY23 FCF was $1.12 billion for a 4.9% margin.
Operating cash flow growth is expected to unfold as one of the larger fundamental recoveries in 2024. Current estimates point to nearly 277% YoY growth in OCF to $6.28 billion, or a margin in the 24% range based on current revenue estimates of $25.7 billion for the year.
AMD has $5.77 billion in cash and equivalents on hand, and total debt of $2.47 billion.
MI300 GPU Sales in Focus
As noted earlier, AMD’s MI300 GPU revenue outlook for the full year will be the most important data point coming out of Q1’s report, after AMD increased its outlook by 75% last quarter.
Analysts are hinting towards possible weakness in Q1 due to rumors of Microsoft cutting some orders, though other analysts are expecting full year GPU revenue of $8B, more than double AMD’s guide. This is setting up an interesting scenario in which even if AMD surprises with better-than-expected GPU revenue in Q1, the full year picture may still disappoint against outsized expectations for $4.5B+ all the way to $8B.
Here’s some recent analyst commentary and updated expectations for GPUs:
- Susquehanna analyst Christopher Rolland said it is likely that “upward revisions to the MI300 are ‘necessary’ for the stock to move higher, especially as investor sentiment has cooled” following Nvidia’s GTC conference. “Buy-side expectations for the MI300 are as high as $8B, while Rolland estimates revenue from the MI300 for this year at around $5B.”
- Deutsche Bank “believes the most anticipated aspect of the quarter will be any update to the company's 2024 outlook for MI300 revenues. On this metric, it thinks buy-side expectations have recently fallen on the back of suspected order cancellations by Microsoft, which are yet to be substantiated, but still are likely at a minimum of $4B.”
- TD Cowen is expecting strength in the data center and “increased its MI300 2024 revenue estimate to $4.5B from $4B, saying ramps at several customers will continue to happen more quickly than typical.”
- HSBC says that “market expectations for the company's MI300 2024 and 2025 revenue have been reset,” but thinks AMD “has enough supply capacity and demand to surpass management's artificial intelligence revenue guidance” for the year.
- Baird believes “MI300X orders have been cut by a U.S. hyperscaler recently,” saying that the “magnitude of the initial order suggests it was a multi-year agreement, but it does not know whether the cut is due to market share shift or the hyperscaler scaling down to numbers more in line with shipment expectations.” Baird also “continues to believe there is ‘comfortable upside’ in AMD's artificial intelligence revenue guidance for this year, based on high-bandwidth memory order visibility.”
- Wells Fargo analyst Aaron Rakers says the “focus on AMD is squarely on upside related to its MI300X accelerator chips,” and sees “a path towards AMD generating $8B in revenue from the MI300 (up from $3.5B to $4B), and wonder if there is a recovery in the traditional server market and an ‘underappreciated’ story in market share gain.” Rakers adds that concerns over Microsoft’s order cuts are “too narrowly cited."
While rumors for Microsoft’s order cuts are yet to be substantiated, there are further notes discussed on the site Tom’s Hardware that Microsoft is reportedly able to purchase MI300 GPUs at a 33% discount, at approximately $10,000 per GPU compared to a $15,000 price tag for other customers. This could present a margin headwind in Q1 should Microsoft account for a majority of GPU shipments in the quarter due to the pricing discrepancies.
In the bigger picture, to meet the lowest end of analysts’ GPU revenue estimates of $4 billion and $4.5 billion, AMD would need to boost its forecast by 15% to 30% — the question here is whether management has enough visibility after one quarter to confidently raise its full-year outlook to that extent after raising it by 75%.
Big Tech Capex Commentary
Capex commentary from Big Tech last week was directionally bullish, with Microsoft, Meta and Alphabet expecting to spend upwards of $135 billion this year, predominantly on AI infrastructure. This sets up a positive long-term picture for AMD to increase market share against Nvidia among the major hyperscalers, given AMD’s GPUs are available, can compete on performance, and undercut on price.
Microsoft increased its capex 80% YoY to $14 billion this quarter, and for the entire fiscal year, capex will increase approximately 50% YoY to more than $50 billion. Demand for Azure’s AI services is outpacing its capacity in the near-term, hence the need for Microsoft to accelerate spending to boost GPU supply.
Meta boosted its full year capex range to $35-40 billion, up from $30-37 billion, to build out AI infrastructure and support its internal AI roadmap. However, Meta’s Q1 capex was only $6.7 billion, implying that the bulk of this spend will hit in the second half of the year and accelerate into 2025. By the end of 2024, Meta is aiming to have 350,000 H100 GPUs and 600,000 total GPUs including H100 equivalents, leaving ~250,000 GPUs split between its custom processors and AMD’s MI300. Assuming AMD can capture 50% of that remaining 250K units, MI300 revenue to Meta may surpass $1.8 billion this year.
Alphabet’s capex rose 91% YoY to $12 billion in Q1, primarily for technical infrastructure – this capex spend was led by servers and followed by data centers. Management is expecting quarterly capex “to be roughly at or above the Q1 level,” implying a full-year capex around $50 billion.
Overall, the planned capex outlays and management commentary from the trio is ultimately bullish. Meta’s Q1 spend declined ~$300 million YoY, and was low compared to its full year forecast, and rumors for Microsoft’s order cuts can’t entirely be shrugged off. As such, there is a chance that Q1’s data center and MI300 sales come in light before finding strength in the back half of the year.
AMD Count and Game Plan
By Knox Ridley
This is the bullish count we’re following, and it’s the best interpretation higher given the price information. Here’s what we would guess based on the current technicals: we get a final drop into the $138 region, which will get bought, and then we push higher. If this is going to happen, we must hold $128. Below here and we could see a bigger drawdown take hold, as the below path higher will get invalidated.
Look at the red arrow in the chart above. That’s indicating a 3-wave bounce, which is usually corrective (suggesting lower). This is happening on momentum making a higher high with price making a lower high (common in downtrends). However, I think that what is missing is the final 5th wave lower before reversing. This is a very stretched downtrend pattern, so we should see a reversal soon.
Look for us to buy around $138 on a pullback or around $174 if we get a breakout. If price breaks below $128, we will risk manage the position. (Note: real-time trade alerts and weekly webinars reviewing IOF positions are offered for Advanced Members)
Insiders Activity
Since February of 2024, we’ve seen about $95M of insider sells. Lisa Su was about $50M of this total. Forrest Norrod and Victor Peng also had sales above $10M. The CTO sold about $8M. This is the largest cluster of sales since December of 2021. The synchronicity of four top tier execs, two on the same day, is not my favorite thing to see. We collect these details to help inform our decision if the stock should break a key level.
Conclusion
AMD’s Q1 report is one of the most highly anticipated reports of the quarter as the company is battling both lowered near-term estimates and heightened long-term expectations for GPU revenue. Analyst estimates on MI300s range from $4 billion to $8 billion.
AMD’s fundamentals are expected to improve throughout the year as data center sales accelerate, with operating cash flow growth of nearly 277% on top of an acceleration in EPS growth to the 90% range by the first quarter next year. We’re continuing to track Big Tech’s capex for signs on AI spending, and so far, there’s indications that spend will continue to increase for multiple quarters, leaving time for AMD to gain share.
Analyst estimates are showing a sizable rebound in H2. Let’s see what management says. Stay tuned for our post-earnings report in your inboxes tomorrow night.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis
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