Welcome to the realm of innovation and silicon prowess. As the dust settles on the second quarter of 2023, Advanced Micro Devices (NASDAQ: AMD) stands before us with a narrative that blends technological triumphs and market complexities. The semiconductor giant recently reported a top-line, and bottom-line beat in its quarterly performance in the face of a dynamic semiconductor landscape. 

The company’s $0.58 earnings per share (EPS) from the quarterly revenue of $5.4 billion beat the market’s EPS expectation of $0.574 on revenue of $5.319 billion, unveiling a dichotomy of growth and challenge. A gross margin of 46% adds depth to the picture. But it’s within these numbers that we unearth stories of 4th Gen EPYC and Ryzen 7000 processors propelling AI engagements to unforeseen heights—a testament to the strategic weight of AMD’s product portfolio. 

Yet, this tale isn’t devoid of challenges. The Data Center segment’s 11% year-on-year decline echoes the complexities of soft Enterprise demand and Cloud inventory management. Simultaneously, the Client segment navigates a 54% year-on-year revenue decrease in the wake of the PC market’s fluctuations. 

Technical 

The picture below shows that AMD’s share has surged magnificently by 78.82% year-to-date (blue dotted line), painting a vivid portrait of its bullish trajectory this year. In contrast, the S&P 500 posted a respectable 16.63% appreciation (purple line), while the Nasdaq 100 soared impressively by 40.35% orange line), driven by the apparent tech fervour. AMD’s exceptional climb illustrates strong positive momentum, potentially guided by factors like robust earnings, market sentiment, and innovation prowess. 

AMD’s outperformance can be attributed to a number of factors, including the company’s strong product pipeline and its focus on high-margin markets. AMD is also benefiting from the growing demand for semiconductor products, which is being driven by the rise of artificial intelligence and other technologies. 

Source: FairMarkets Australia – Koyfin, Mfanafuthi Mhlongo 

The daily chart shows that the current price of $115.82 unveils a compelling narrative, resonating with both technical analysis and valuation perspectives. While trading within a descending triangle pattern, the price appears to be swimming against the tide yet still maintains an upward trajectory above the 200-EMA (orange line) and the 50-EMA (blue line), which could act as additional support to the price action. The golden cross, where the 50-EMA crossed over the 200-EMA, is emblematic of the shifting momentum, possibly hinting at a bullish undertone.  

Should the price sustain its rise beyond the 50-EMA, the first target at $121.73, for a possible 16.68% upside as the share price approaches its discounted cash flow estimated fair value of $142.03 (green line), comes into view. Beneath the surface, a captivating interplay of numbers emerges. Immediate support is poised at $107.35, poised to shield the price from abrupt downturns, while a secondary support level at $87.83 stands as a sturdy barrier against deeper plunges. Both levels could offer long opportunities for investors looking for exposure to the company. 

Fundamental 

The company delivered a Q2 2023 revenue and earnings figures of $5.359 billion, surpassing the market’s expectations of $5.319 billion, a gross margin of 46%, and a net income of $27 million. Yet, these numbers become more compelling when viewed through the lens of non-GAAP, with a 50% gross margin and a substantial operating income of $1.1 billion. The bottom line speaks to a diluted earnings per share of $0.02, but the real tale emerges when these digits are adjusted to a more relevant $0.58 on a non-GAAP basis, exceeding the street’s expectations of $0.574. 

On the positive side, AMD’s data center revenue increased 2% sequentially, driven by strong demand for its 4th Gen EPYC processors. The company also saw strong growth in its AI engagements, with multiple customers initiating or expanding programs supporting future deployments of Instinct accelerators at scale. 

In the client segment, AMD’s revenue declined 54% year-over-year, but it did see sequential growth of 35% as AMD Ryzen 7000 Series CPU sales grew significantly. The embedded segment was the only segment where AMD saw year-over-year growth, with revenue increasing 16%. This was driven by strength in the Industrial, Vision and Healthcare, Automotive, and Test and Emulation markets. 

AMD’s journey, however, isn’t without its potholes. The Data Center segment, while showing signs of recovery, grapples with a YoY decline of 11%, a result of softer Enterprise demand and inflated Cloud inventory levels. Equally, the Gaming segment, a dynamic theatre of growth and competition, experiences a 4% YoY decline due to lower gaming graphics revenue. The Embedded segment, on the other hand, rides the wave of a 16% YoY upsurge, fuelled by robust performance across markets like Industrial, Vision, Healthcare, Automotive, and Test and Emulation. 

CEO Dr Lisa Su’s narrative adds depth to these numbers. With the robust growth of 4th Gen EPYC and Ryzen 7000 processors, Su believes the tide is in AMD’s favour. More intriguingly, the AI domain has ignited, with AI engagements growing over sevenfold in the quarter, a testament to the magnetism of Instinct accelerators. The tale of numbers, though, is a symphony conducted by market sentiment and future potential. Su’s assertion of “multiple winners” in the AI arms race might just find resonance with the likes of Meta Platforms Inc. spinoff PyTorch and Onyx as partnerships pave the path to higher-level AI models. 

The picture below shows that AMD has displayed a remarkable journey of growth, with a five-year total return of 526.39% (blue dotted line), translating to an impressive cumulative annual growth rate (CAGR) of 44.28%. AMD’s performance has been driven by a number of factors, including the company’s focus on high-margin products, such as its Ryzen processors and Radeon graphics cards. AMD has also benefited from the evolving market dynamics and growing popularity of gaming and cryptocurrency mining, which has increased demand for its products. 

In comparison, the S&P 500 index has returned 57.66% (black line) over the past five years, and the Nasdaq 100 index has returned 107.61% (purple line). This suggests that AMD has outperformed the broader market over the past five years. AMD’s performance has also been better than most of its peers, with only Nvidia’s total return of 615.46% (red line) surpassing AMD’s return over the past five years. Qualcomm has returned 112.44% (green line), with Intel underperforming the market, with a total return of -18.08% (orange line). 

Overall, AMD’s total return for the past five years has been impressive. The company’s focus on high-margin products and its strong execution have helped it to outperform the broader market, leaving the company well-positioned for continued growth in the future as the semiconductor landscape continues to evolve.  

Source: FairMarkets Australia – Koyfin, Mfanafuthi Mhlongo 

AMD’s recent quarterly performance reveals a mixed picture in key financial metrics, showcasing both strengths and areas for improvement. The picture below reveals that the company’s inventory turnover has shifted from 5.3x in Q3 2018 to 2.5x in the latest quarter, suggesting a slowdown in the efficiency of converting inventory into sales. However, the company’s gross profit margin has seen a notable uptick, advancing from 39.99% in Q3 2018 to an impressive 49.54% in the latest quarter due to the company’s focus on high-margin products. This points to effective pricing and cost management strategies, enhancing profitability. 

In terms of net income margin, AMD has experienced a decline, moving from 6.17% in Q3 2018 to 0.5% in the most recent quarter. This decline could be attributed to various factors, such as increased expenses and shifts in market dynamics. Comparing AMD with its peers, the analysis offers intriguing insights. While Intel’s inventory turnover slipped from 3.7x to 2.7x, Intel’s gross profit margin underwent a substantial decline from 64.50% to 35.82%. In contrast, Qualcomm’s inventory turnover saw a steeper drop from 7.3x to 2.2x, yet Qualcomm’s gross profit margin improved from 44.88% to 55.13%. Nvidia, on the other hand, exhibited a decrease in both inventory turnover (from 4.0x to 2.1x) and net income margin (from 38.67% to 28.41%), although its gross profit margin rose from 60.39% to 64.63%. 

These figures underline the intricate interplay between inventory management, profitability, and financial health in the competitive semiconductor sector. While declining inventory turnover raises concerns about operational efficiency, the success in boosting gross profit margins showcases companies’ abilities to navigate challenges. This intricate financial dance showcases the dynamism of the semiconductor industry, where companies like AMD continuously strive to find equilibrium in the pursuit of sustainable growth. 

Source: FairMarkets Australia – Koyfin, Mfanafuthi Mhlongo 

As the tech race unfolds, AMD stands poised to address market pull for data center AI solutions. The impending launch and production ramp-up of MI300 accelerators in Q4 2023 hint at AMD’s commitment to staying ahead in the innovation curve. 

Summary 

As the investment community scrutinizes every pixel of the quarterly canvas, AMD’s performance is a blend of solid growth and poignant challenges. It’s a reminder that within the world of semiconductors, where digits and data collide, the narrative remains dynamic, and each quarter is a new chapter in the pursuit of technological evolution. 

Thus, with the company well-positioned to benefit from the strong growth in the semiconductor market, and its focus on high-margin products should continue to drive growth, an opportunity could exist at $121.73 to ride the tide with the company. However, the $107.35 could offer opportunities lower should the share price succumb to the bears in the short term. 

Sources: TradingView, Reuters, AMD, KoyFin, CNBC, Trading Economics, Seeking Alpha.