AMD Q2 Earnings Beat Expectations Significantly, Is AMD A Buy?

AMD NASDAQ: AMD reported second-quarter earnings on the 2^nd of August 2022, with revenue surging by 70% y-o-y, but shares fell anyway in after-hours trading. The decline in the stock price can be attributed to management's forecasts for the third-quarter, where it expects revenue to come in slower than expected.

Semiconductors have been under pressure from analysts who have been predicting that the industry may soon face a cyclical downturn, but those predictions have not come to fruition as chip-makers continue to witness strong revenue on the back of unmet demand. Other chip makers have fared similarly well, and the likes of Nvidia NASDAQ: NVDA, which has been the main competitor for AMD, also beat analyst expectations quite handily during the recent quarter despite talks of a slowdown.

Analysts had also feared that chipmakers would see downward pricing pressure due to a glut of chips in the markets, which would then push revenue lower as well, and while prices have come down slightly, they have not materially affected revenue in any significant way, as most of the pricing issues have been borne by resellers, who brought up chips in order to resell them at a premium. 

“We delivered our eighth straight quarter of record revenue based on our strong execution and expanded product portfolio,” said AMD Chair and CEO Dr. Lisa Su. “Each of our segments grew significantly year-over-year, led by higher sales of our data center and embedded products. We see continued growth in the back half of the year highlighted by our next generation 5nm product shipments and supported by our diversified business model.”

AMD’s product portfolio remains strong as revenue continues to beat expectations

The outlook for semiconductors remains strong, despite talks of a cyclical slowdown. AMD's results continued to do well, as all three segments witnessed strong demand. AMD’s Zen and Zen-2 architecture, which are 50% faster than the previous generation of chips, continue to be the biggest drivers of revenue.  The client segment with the Ryzen processor witnessed revenue increase by 25% for the year, to $2.2 billion, and the gaming segment also continued to do well, with revenue up 32% y-o-y, as semi-custom products offset declines in gaming graphics revenue.  Finally, the data center revenue grew by 83%, despite talks of a data center bubble by analysts.

The acquisition of Xilinx resulted in gross margins declining by 2%, mainly on the amortization costs, but these costs will go away during the next quarters, which should help margins get back on track. Operating margins also came under pressure during the quarter, falling by 37% on a GAAP basis, due to adjustments, but increasing by 6% on a non-GAAP basis.

The future looks bright as new chips continue to be released over the next few years

AMD has said it will release the Zen-4 eventually either in late 2022 or in 2023. The Zen-4 chip is expected to see marked improvement over the previous Zen-3 chip delivering both an increase in performance and efficiency. It also said that after the release of Zen-4 it plans to release the Zen-5 in 2024, which should only strengthen its prospects. The strong product lineup and demand across industries for chips make it quite likely that revenue will continue to increase at a high rate of growth over the next couple of years. Furthermore, the new RDNA 3 architecture is expected to play a significant role and should deliver over 50% greater performance-per-watt over the previous generation of chips according to AMD, which should help AMD compete with competitors such as Nvidia.  The company is also planning on releasing multiple data center chips, including the Siena and Bergamo processors, which are expected to be the highest performing server processors, and are expected to be released in early 2023.

AMD’s financials and valuation

AMD has continued its good run of form, as the company posted an operating cash flow of over $1 billion during the quarter. AMD has projected that revenue will be around $6.7 billion in the third quarter, a 55% increase y-o-y, but with a backlog of demand, and pricing power remaining intact, those numbers could again beat expectations. The forward price-to-earnings (P/E) stands at 22x, which makes the chip maker quite cheap. But analyst warnings, which have been mostly incorrect so far, continue to weigh on sentiment, and as a result, the stock hasn’t been able to maintain its run.  Net profit margins on a non-GAAP basis increased to 26%, and at these levels of margins, a simple DCF calculation puts the company’s fair value closer to $150-155 indicating an upside of over 50%.