AMD provided a solid report yet the market is struggling to find room in its valuation. Similar to Microsoft, the only time that AMD has traded this high on sales was in 2020 and again at the top 2021.
By my estimation, the selloff has nothing to do with AMD’s AI potential, or even the sequential decline in the other segments, rather it’s about timing and tech being stretched overall. We covered this in great detail in the Q1 webinar.
It’s true that AMD is trailing a GPU giant, and any guide will pale in comparison to Nvidia’s glorious 2023 performance. Yet it’s also true that AMD is coming out swinging with $3.5B in GPU revenue in the first quarter the GPUs are shipping. In a previous note, I stated: “Technically speaking, this report [Q3] was stronger than Nvidia’s was this time last year despite the GPUs shipping at the same time seasonally – NVDA had 1% QoQ growth for data center revenue in the October quarter and then declined (-6%) QoQ in the Q4 January quarter. To jog your memory, it was the guide provided in May (for the July quarter) when Nvidia had its blowout quarter.” To compare, data center growth for AMD is 38% YoY and 43% QoQ. However, Nvidia enjoyed the luxury of taking the market by surprise, and so expectations were low.
The $2 billion guide for FY2024 GPU revenue from last quarter was raised to $3.5B “plus” this quarter. Part of the issue is that analysts, independently, are creating very high expectations. The whisper number going into the report was $3 billion to $3.5 billion with some pushing for a $6 billion guide. The reason investors should separate the wheat from the chaff is that raising GPU sales by 75% in one quarter is actually very impressive (and more than enough for one quarter for our purposes). As a reminder, this is the first quarter the MI300s are shipping.
AMD will have to face outsized expectations as the company ramps, yet the 75% raise is a great start. We dissect the rest of the report for you below.
Financials:
Revenue and EPS:
- Revenue of $6.28 billion was in line with management guidance of $6.1B +/- $300M. Analyst consensus was $6.14B.
- The guidance for Q1 missed with $5.4B guided versus $5.78B consensus.
- Adjusted EPS of $0.77 came in as expected with $0.69 adjusted EPS expected next quarter. GAAP EPS was $0.41.
Margins:
The adjusted gross margin guide expanded by one point and this is expected to continue to expand as data center increases in the product mix.
- Gross margin of 47% was in line with last quarter
- Adjusted gross margin of 51% and adjusted gross profits of $3.14 billion was in line with management guidance. The company guided for adjusted gross margin of 52% next quarter.
- Operating margin of 6% expanded by two points and has been steadily increasing over the past few quarters.
- Adjusted operating margin of 23% was in line with management guidance for adjusted operating profit of $1.41 billion.
- GAAP net margin of 10.7% is a nice beginning to the bottom-line recovery for AMD, up from 5% in the previous quarter and up from 0% in the year ago quarter. Adjusted net margin was 18.6% for adjusted net income of $1.25 billion.
Regarding margins, it was indicated that the second half of the year would show improvement. Per the CEO: “I would say the headwinds side [of gross margin] 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. That is a headwind for us. Because it does have a very nice gross margin. But overall, we feel pretty good about the trajectory of the gross margin improvement, especially second half.”
Cash:
AMD reported operating cash flow of $381 million for a margin of 6.1%. This is lower than the previous quarter at 7% and the year ago quarter at 10%. This was due to “paying $550 million in cash taxes, primarily due to previously deferred taxes from California disaster relief efforts made available by the IRS.”
Free cash flow of $242 million for a margin of 4% was 1 point lower than the previous quarter and 4 points lower than the year ago quarter.
Product Mix:
Data Center:
The data center revenue was $2.3 billion, up 38% YoY and up 43% QoQ. The full year data center revenue was $6.5 billion, up 7% YoY. Next quarter, data center revenue is expected to be flat with “a seasonal decline in server sales offset by a strong Data Center GPU ramp.”
As stated, GPUs are expected to grow sequentially and exceed $3.5 billion in FY2024. In Q4, GPUs were $400 million of the $2.3B in data center revenue. There was an overabundance of questions about the GPU number which I’ve detailed for you below. However, here is one comment the CEO said: “And so, we worked closely with our supply chain partners to ensure that we can ship more than $3.5 billion, substantially more depending on what customer demand is as we go into the second half of the year.”
The CFO stated: “Yeah, Harsh. Let me answer your question about the MI300. Exiting Q4 2024, is it possible to get to $1.5 billion? It is possible, right, because Lisa mentioned earlier, we'll see sequential increase in each quarter and more back-end loaded in second-half and we do have a supplies more than $3.5 billion. And of course we will continue to make progress with our customers. So the math, yeah, it's possible, but right now we are really looking at focus on the execution of the current $3.5 billion plus.”
Client Segment:
The Client segment reported Q4 revenue of $1.5 billion, up 62% year-over-year yet was flat sequentially. This is lower than my notes anticipated as the guide last quarter for Client was “sequentially, Client revenue to increase.”
The CFO stated “Client is very similar to server, typically Q1 is high-single-digit to low-double-digit. That's consistent with past.”
Data center GPUs dominated the Q&A whereas this segment is incredibly important to AMD’s near-term price action (near-term is defined as this year, particularly in the second half). I’m not concerned about “if” it’ll happen rather “when” the AI PC market will become a large contributor to AMD’s revenue. Will it be this year or next? If I had attended the call, I would have asked more about this as a 75% increase in GPU revenue is plenty for one quarter when they’ve only begun to ship these units, whereas more clarity on this segment can help time AMD’s next leg up.
Moving forward, for next quarter, Client is expected to decline sequentially. This is normal for Q4 to Q1 due to seasonality. The CFO stated the following about 2024: “Directionally, for the year, we expect 2024 Data Center and the Client segment revenue to increase driven by the strengths of our product portfolio and the share gain opportunities.”
We dug up the following analyst note regarding the Client segment potentially rebounding in H2 2024: (01/23) Although PC shipments were reduced during the fourth-quarter, "we expect standard server requirements will normalize in the coming quarters, creating upside to server demand beyond the mid-single-digit growth anticipated by industry analysts," Wedbush analyst Matt Bryson wrote in a note. The anticipated recovery is in part due to the "replacement cycle" of PC's purchased during the pandemic, which is expected to occur during the second half of this year, Bryson said. "We are lifting our estimates for 2024 and 2025 given more confidence in our expectation standard server builds lift, and our belief that PC sales dip less seasonally and recover more in the second half of the year," Bryson wrote.
Gaming:
Gaming is weighing on AMD’s numbers as this segment has not bottomed yet. The segment reported $1.4 billion in revenue and was down (-17%) YoY and down (-9%) QoQ.
The guide on gaming was a lowlight: “Gaming segment sales are expected to decline sequentially, with semi-custom revenue expected to decline by a significant double-digit percentage.” This means Q4 is certainly not the bottom on gaming either. The CFO stated the same about FY2024 Gaming revenue which is that “Directionally, for the year […] Gaming segment revenue to decline by significant double-digit percentage.”
It was also stated by the CFO that gaming will decline by more than 30% in Q1: “On the Gaming side, Lisa mentioned during his — her prepared remarks is we have the latest stage of product cycle in the year five of gaming console. But at the same time, we also have inventory at the customers. So, the combination of those impact, we expect the Q1 Gaming sequential declines probably more than 30%, so hopefully that help you a little bit.”
Embedded:
Embedded reported $1.1 billion in revenue, which is a decline of (-24%) YoY and (-15%) QoQ. This is due to increased inventory. The CFO stated the following about 2024 Embedded revenue: “Directionally, for the year […] Embedded segment revenue to decline” yet later stated: “And at the same time Embedded is going through the bottoming process. We do think the second-half we will see the recovery.”
Management did highlight that Embedded drove a 25% increase in design wins to $10 billion. This will come in handy for the automotive push we want to see our portfolio participate in 2026-2028, which I also discussed on the webinar.
Earnings Call:
MI300 GPU Questions Were Plentiful:
Most of the questions on the call were fruitless attempts to get AMD to raise the 2024 GPU guide. Instead, management stuck to the $3.5 billion plus comments. Overall, it’s quite clear that $3.5 billion will become a distant memory as we move through the year but management isn’t willing to give away too much, too soon.
Joseph Moore
Great. And for my follow-up, I guess a lot of the forecasting of your business that I'm hearing is coming from supply chain and we're sort of hearing AMD is building X in Asia. I guess, how would you ask us to think about that? Are you looking at being kind of sold-out for the year and so the supply chain would be close to revenue? Are you building for the best-case scenario? Just I worry about sometimes expectations when people hear the supply chain numbers. And I'm just curious how you bridge the gap.
Lisa Su
Yeah. So, I mean, Joe, I think we updated our revenue expectations this quarter from our original number of $2 billion to $3.5 billion to try to give some bounding on some of the discussion out there. The way to think about the $3.5 billion is these are customers that we're working with, who have given us firm commitments on what they need. As you know, the lead times on these products are quite long. So, it's important to have those forecasts in early and we have a strong order book. So, that gives us good confidence to exceed the $3.5 billion. From a supply chain standpoint, our goal is always to build more supply we — and so, from that standpoint, we have also worked with our supply chain partners and secured significant capacity. Think about it as first half capacity is tight and more comes on in the second half of the year, but we've certainly made more progress there. So, we do have more supply, and we're going to continue to work with our customers on their deployments and we'll update that number as we go through the year.”
Here was another good discussion on the MI300 and the trajectory investors can expect in 2024:
Toshiya Hari
Hi. Thank you for taking the question. I had one on the MI300 as well, Lisa. I guess, first of all, how should we think about the quarterly trajectory beyond Q1? You talked about Q1 being up sequentially. Is it fair to assume kind of a straight line as we progress through the balance of the year? Or is it more second half skewed? How should we think about that? And I guess more importantly, some of the cloud potential customers that have yet to officially sign-up for or sign-off on the MI300. I guess what's the sticking point? Is it just a function of time and you just need a little bit more time to go back-and-forth and tweak things or is there a software kind of concern? I guess what's holding them back at this point?
Lisa Su
Yeah, Toshiya, thanks for the question. So, first on the MI300 trajectory. I think you would expect that revenue should increase every quarter from now through sort of the end of the year, but it will be a bit more second half weighted and part of that is just customers as they're finishing up their qualifications in their lines as well as sort of how our supply chain is ramping. So, yes, it should increase each quarter, but be a bit more second half weighted. And then, to your comment about customers, look, we are engaged with all of sort of the large customers. These are all folks that know what's really well, given our deep relationships in EPYC. I think people just have different adoption cycles as they consider what they're trying to do in their roadmap. But I view this as still very, very early innings for us in this space. And I think the question was asked earlier. I think the key is this is not just about MI300 conversation. But it really is about sort of our long-term multi-generational roadmap. And so, that's the context on which we're working with our largest customers, as well as, as you know, there's a lot of demand coming from folks that are more AI centric and not necessarily typical cloud customers, but more enterprise or let's call it AI-specific companies that we're also very well engaged with.”
More on Embedded and Gaming:
The CFO provided the following color on embedded and gaming:
Jean Hu
Yeah, Aaron, I'll give you some color about Client seasonality and others. So, Client is very similar to server, typically Q1 is high-single-digit to low-double-digit. That's consistent with past. On the Embedded side, it's very consistent with what we said in the past and the consistent with what you see in the industry's Embedded business is going through a bottoming process, and we think Q1, it will have a low-double-digit sequential decline. That's Embedded. On the Gaming side, Lisa mentioned during his — her prepared remarks is we have the latest stage of product cycle in the year five of gaming console. But at the same time, we also have inventory at the customers. So, the combination of those impact, we expect the Q1 Gaming sequential declines probably more than 30%, so hopefully that help you a little bit.
Conclusion:
AMD has been kind to investors over the past year with 200% gains since Jan 1, 2023 – and the kicker is that AI revenue was officially realized in Q4 for the first time, at a mere $400 million. The market is correct to anticipate that AMD will be a major player in AI. How long until AMD becomes officially number two? Right now, Broadcom is expected to report $7 billion in AI revenue for 2024. I think AMD will surpass Broadcom very quickly.
From there, it will be a battle – a fun one for us to observe as we own both NVDA and AMD. Readers on our site know that I call AMD the “Dark Horse” because it’s frequently underestimated. The stock sold off in July when AMD held their AI event to officially announce the MI300s. Today, the stock is selling off in the quarter the company is shipping them. Clearly, the market sees potential, hence the stock performance. Yet, AMD investors should be prepared for periods of doubt, similar to when AMD emerged as a leading CPU design company. We are looking to be entering one of those periods now.
With that said, tech has a way of becoming stretched, especially following a historic year for the Nasdaq (btw, 2023 was the leading year for gains in over 20 years since dot-com era, edging out 2009), and thus we have not been buyers of AMD as of late. In the near-term, following our technical analysis and broad market plan is going to be as equally important as following our stock analysis.
On that note, this Thursday, Pro Members are invited to attend a special 1-hour webinar with Knox Ridley as he goes through what investors can expect for tech stocks in Q1 and the risks present in the market. We encourage our Members to attend the webinar or watch the replay as the I/O Fund continues to deeply strategize for 2024. Keep an eye out for details via your inbox tomorrow.
Housekeeping: Mailchimp was down system-wide for a period of time yesterday, you may have received emails at sporadic times once MC was operable again! We seem to be back up and running just fine now.
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