Source: Beast Finance Author: Beast Finance
Summary:
(1) AMD, the core company in the global semiconductor market, is expected to announce its financial report for the second quarter of 2023 in the next two weeks.
(2) According to Gartner's report, the shipments of major companies in the global PC market have begun to recover, with an increase of 8.1% compared with the previous quarter.
(3) AMD's stock price has risen by 80.1% since the beginning of 2023, far outperforming its main competitors in the semiconductor industry, despite the decline in revenue from AMD's two business units.
(4) After rejecting a partnership with Nvidia (NVDA) on the DGX Cloud project, the possibility of Amazon (AMZN) using AMD artificial intelligence chips in its project has risen sharply.
Key indicators for AMD stock
As one of the core companies in the global semiconductor market, although AMD has not yet confirmed the specific date for the release of its second-quarter financial report in 2023, it is expected that it will be released on August 1, 2023, because this is AMD's consistent practice.
In recent years, AMD has continued to increase its share of the global CPU processor market through an innovative approach to developing and implementing Ryzen processors based on its Zen architecture, which already has better energy efficiency and higher performance compared to Intel (INTC) products and AMD's previous processors.
In addition, AMD's GPUs are gaining popularity due to the popularity of the Radeon line of desktops and laptops, and are starting to compete more aggressively with Nvidia. For example, the Radeon RX 7900 XT and Radeon RX 7900 XTX graphics cards, based on the high-performance AMD RDNA 3 architecture with process optimization and infinite cache technology, have significantly increased the memory capacity of desktops and notebooks equipped with Radeon series graphics cards.
In addition, Sony's PlayStation and Microsoft's Xbox game consoles also use AMD's SoC products, and both companies outperform their competitors in terms of energy efficiency and performance by using AMD's RDNA GPU architecture.
In the second half of 2023, through the cooperation with Amazon, it may also increase AMD's cash flow. The possibility of Amazon using AMD artificial intelligence chips in its project has risen sharply after rejecting a partnership with Nvidia on its DGX cloud product. According to Reuters, although AWS has not made any official statement on its plan to use AMD MI300 chips, Dave Brown, vice president of Amazon Elastic Computing Cloud, said that the company has deliberately considered introducing AMD chips.
Thanks to strong business growth momentum and heavy investment in artificial intelligence, AMD's stock price has risen by more than 80% since the beginning of 2023, far surpassing rivals in the semiconductor industry such as Intel, Micron Technology and Texas Instruments.
AMD's Financial Situation and Its Prospect Analysis
AMD's revenue for the first three months of 2023 was $5.35 billion, down 4.5% from the previous quarter and down 9.2% from the first quarter of 2022. The main reason for the decline in the company's revenue was the client segment, which focuses on developing and commercializing CPUs, various chips, APUs, and graphics processors for personal computers. In the first three months of 2023, the total sales of this segment were US$739 million, a decrease of approximately US$1.39 billion from the same period last year, mainly due to the decline in processor prices and shipments.
Even so, AMD's actual revenue beat analysts' consensus estimates in eight of the past nine quarters, suggesting Wall Street is underestimating AMD's ability to innovate during a challenging time for the semiconductor industry. Overall, we believe that since the beginning of the third quarter of 2023, and after the sharp decline in consumer demand for PCs in 2022, the pace of AMD's recovery has accelerated, which will also have a positive impact on its financial situation.
According to S&P capital IQ, sell-side analysts expect AMD to report revenue of $5.17 billion to $5.6 billion in the second quarter of 2023, a 0.6% increase from analysts' expectations for its first quarter of 2023. According to our model calculations, total sales of AMD products and services will reach $5.56 billion in the second quarter of 2023. AMD management, on the other hand, expects its Q2 2023 revenue to be approximately $5.3 billion, plus or minus $300 million compared to our model forecast.
The reason why sell-side analysts and management are predicting AMD's second-quarter revenue growth will be primarily driven by AMD's two business segments. The first is the gaming business. In AMD's product portfolio, in addition to the GPU business, there is also an accelerated processing unit (APU) business that combines the CPU and GPU on a single chip. This solution facilitates improved energy efficiency and reduced system size, making AMD a leader in this fast-growing market. AMD's main customers in this area are Microsoft and Sony, which buy AMD's chips for the PlayStation and Xbox series of game consoles.
Sony has yet to reveal an exact release date for the PS5 Pro. However, based on historical data from previous PS4 Pro model releases, it can be assumed that this will happen in the second half of 2024. Overall, PS4 performance has improved significantly thanks to AMD's next-generation GCN computing unit.
With AMD launching a new generation of graphics cards based on the RDNA 3 architecture in the fourth quarter of 2022 (which can provide higher frame rates when using ray tracing and supporting games up to 8K), Sony also has the technical capabilities to accelerate the development of its new console.
At the same time, PlayStation's main competitor, Xbox, is also expanding its business. On July 16, Phil Spencer said that following the $69 billion acquisition of Activision Blizzard, the company had signed a deal to keep Call of Duty on the PlayStation. Beast Finance believes that this news, coupled with Microsoft’s victory in the lawsuit with the US Federal Trade Commission and the news that the UK’s Competition and Markets Authority will reconsider Microsoft’s acquisition of Activision Blizzard, makes the transaction very likely to be completed. Therefore, Boldbeast Finance believes that competition in the global game market will intensify. And this requires Sony to increase investment in game development and accelerate the release of a new generation of game consoles, so as not to lose share in this market.
We use the model to calculate the revenue of AMD's gaming business in the next five years and conclude that AMD's total sales in 2023 will reach US$7.45 billion, an increase of 9.5% over the previous year, and this figure will reach US$11.93 billion in 2027.
In addition to the game business, Beast Finance believes that another major factor affecting AMD's financial situation is the client business, whose revenue is approximately US$739 million, a year-on-year decrease of 65.2%. However, the sales decline in this segment was expected due to the sharp decline in consumer demand for PCs in recent quarters. But according to Gartner's report, the shipments of major companies in the global PC market have begun to recover, increasing by 8.1% compared with the previous quarter. Therefore, Beast Finance predicts that from the third quarter of 2023, the total sales of global PCs will grow by a double-digit percentage, which will increase the profit margin of AMD's client business and reduce the impact of short sellers on AMD's stock price.
AMD's EBITA margin in the first quarter of 2023 was 12.67%, which is still lower than the median of 17.92% for the period from January 1, 2021 to the end of March 2023, although there have been signs of a strong recovery on a quarter-on-quarter basis. Beast Finance predicts that by 2023, AMD's EBITA margin will reach 17.5%, and by 2024, this figure will increase to 24.5%, which is also due to the synergy effect of the completion of the acquisition of Xilinx, a market leader in FPGA and adaptive computing. On June 13, AMD announced new details of the MI300X, an artificial intelligence chip with 192G of memory. It will start launching this quarter, and mass production will begin in the fourth quarter of 2023. As such, AMD will be Nvidia's main competitor to the H100, which becomes all the more important after Amazon declined to partner with Nvidia on the DGX cloud service.
According to S&P capital IQ, AMD's EPS in the second quarter of 2023 is expected to be $0.53-$0.64, which is 1.8% higher than the consensus estimate for the first quarter of 2023. While we believe this figure is slightly underestimated, given the solid progress the company has made in the first half, our model suggests AMD will post EPS of $0.66. At the same time, AMD's Non-GAAP P/E [TTM] will also reach 38.52 times, which is 98.21% higher than the industry average and 31.26% lower than the average level of the past five years. AMD, on the other hand, trades at a non-GAAP P/E ratio of 40.25, suggesting that the company is overvalued amid the current hype surrounding generative artificial intelligence and economic recovery in the U.S., China, and the EU.
Beast Finance believes that AMD's earnings per share exceeded expectations mainly due to the launch of new products and the improvement of business profit margins, rather than the stock repurchase plan. In the first quarter of 2023, AMD repurchased its stock for about $262 million. On the other hand, the remaining authorization to repurchase company stock was $6.3 billion as of the end of March this year. So we expect this will allow AMD CEO Lisa Su to reduce the volatility of the company's stock price during the current period of heightened tensions between the US and China.
As of the end of the first quarter of 2023, AMD's total debt was approximately $2.85 billion, and due to the acquisition of Xilinx (Xilinx), which led to a substantial increase in EBITDA in the previous quarter, total debt/EBITDA only increased from 0.16 times to 0.72 times.
Since AMD's total debt/EBITDA ratio is less than 1 times, and its business is diversified, its cash flow is also stable, and its commercialization of MI300X has begun, so Beast Finance expects AMD to have no difficulty in repaying senior bonds due between 2024 and 2052.
Conclusion
While AMD has yet to confirm an exact date for its Q2 2023 earnings release, we expect it to be released on August 1, 2023, as AMD has always done. Overall, we believe that AMD's management will be able to shock Wall Street with very strong financial results thanks to new product launches, quarterly shipment growth from key players in the global PC market, and lower inflation.
At the end of the second quarter, AMD launched the new Ryzen PRO 7040 and Ryzen PRO 7000 series of desktop processors, using TSMC's 4nm and 5nm process technology, respectively. In addition to higher performance and power efficiency than previous processors, the chip can handle a variety of artificial intelligence tasks. As such, this could push companies like Microsoft and Sony to continue opting for devices with these CPUs instead of those powered by the Apple M2 Pro or Intel.
In terms of technical analysis, AMD's stock price has recently rebounded from the support of the 50 exponential moving average, and after a brief rebound, it has begun to correct again. We expect the corrective movement to continue into the strong support area of $105 to $106 per share, where the 100-day moving average resides. After that, AMD's stock price will continue to rise again, breaking the resistance level, thus signaling that Wall Street's most speculative market players will once again be bullish on the company and its potential to increase its share in the global gaming and artificial intelligence markets.