AMD: PCs are bowing down, is AI losing its momentum?

AMD released its fourth-quarter earnings report for 2023 (ending in December 2023) after the US stock market on the morning of January 31, 2024. The key points are as follows:

Overall performance: Mediocre. AMD achieved revenue of $6.168 billion in the fourth quarter of 2023, a year-on-year growth of 10.2%, which is in line with market expectations ($6.132 billion). The increase in revenue was mainly driven by the continuous growth of the data center segment. AMD achieved a net profit of $667 million in the fourth quarter of 2023, and the higher-than-expected net profit was mainly due to changes in income tax items. However, there was no performance that exceeded expectations from an operational perspective.

Business segments: Reliant on data center growth. Looking at AMD's business segments, the data center segment accounted for nearly 40% of the total revenue, driven by its growth. The remaining three segments maintained a share of around 20%. In this quarter, only the data center segment showed sustained growth, while the recovery of the client segment began to slow down.

AMD's performance outlook: Expected revenue of $5.1-5.7 billion for the first quarter of 2024 (market expectation: $5.785 billion) and non-GAAP gross margin of around 52% (market expectation: 51.83%). The revenue is expected to decline by 7.6%-17.3% compared to the previous quarter, mainly due to the decline in revenue from the client and gaming segments.

Dolphin Research's overall view:

AMD's overall data performance was mediocre, with revenue meeting expectations but gross margin lower than expected. The higher-than-expected net profit was mainly due to changes in income tax items. From an operational profit perspective, the company's core operational profit showed a slight improvement, but there was no performance that exceeded expectations.

Looking at the business segments, the data center segment is still growing, while the PC segment is showing signs of weakening growth. Considering the company's guidance for the next quarter's revenue ($5.1-5.7 billion) and non-GAAP gross margin of 52%, although the gross margin meets expectations, there will be a significant decline in revenue. The data center segment is expected to perform steadily compared to the previous quarter, while the client segment, embedded segment, and gaming segment will all experience varying degrees of decline.

Taking into account Intel's previous guidance, the PC industry chain is replenishing inventory, which may impact AMD's performance in the next quarter. The recovery is starting to slow down, which directly affects the company's client business and gaming business. Although there is still demand for data centers, the growth rate of the company's related businesses has also slowed down.

In the case of a slowdown in performance recovery, the logic of AMD's "growth + recovery" in this round will be tested. Dolphin Research believes that based on the current performance of the company, the current market value of 300 billion is not cheap.

Here is Dolphin Research's specific analysis of AMD's earnings report:

I. Overall Performance: Mediocre

1.1 Revenue

AMD achieved a revenue of 6.168 billion USD in Q4 2023, a YoY growth of 10.2%, in line with market expectations (6.132 billion USD). From a MoM perspective, the company's revenue continued to rise this quarter, mainly benefiting from the increased demand for data centers.

1.2 Gross Margin

AMD achieved a gross margin of 2.911 billion USD in Q4 2023, a YoY increase of 21.1%. The growth rate of gross margin exceeded that of revenue, mainly due to the improvement in gross margin rate this quarter.

AMD's gross margin rate in this quarter was 47.2%, a YoY increase of 4.1 percentage points, lower than market expectations (49.8%). The improvement in gross margin rate is mainly due to the increased profitability of the data center and client business units, as well as the reduction in amortization of intangible assets from acquisitions.

1.3 Operating Expenses

AMD's operating expenses in Q4 2023 were 2.155 billion USD, a YoY increase of 10.2%, with both R&D expenses and sales and administrative expenses showing an increase.

Specifically, let's break down the expenses:

1) R&D expenses: The company's R&D expenses in this quarter were 1.511 billion USD, a YoY increase of 10.6%, and R&D expenses have been showing a growth trend. As a technology company, the company continues to prioritize research and development. Even in a period of low performance, the company's R&D efforts are still increasing;

2) Sales and administrative expenses: The company's sales and administrative expenses in this quarter were 644 million USD, a YoY increase of 9.2%. The expense situation on the sales side has a clear correlation with revenue growth.

1.4 Net Profit

In the fourth quarter of 2023, AMD achieved a net profit of USD 667 million, with a net profit margin of 10.8%, which continued to increase compared to the previous quarter.

Due to the significant deferred expenses resulting from AMD's ongoing acquisition of Xilinx, it will continue to erode profits in the near future. Therefore, Dolphin Research believes that "core operating profit" is a more accurate indicator of the actual operating performance for this quarter.

Core operating profit = Gross profit - Total operating expenses

After excluding the impact of acquisition expenses, Dolphin Research estimates that AMD's core operating profit for this quarter is USD 756 million, an increase of 13.9% compared to the previous quarter, benefiting from the growth of the data center business.

II. Business Segments: Driven by Data Center

Looking at the breakdown of the company's business segments, the data center business accounts for nearly 40% of the total. The remaining three business segments maintain a share of around 20%.

2.1 Data Center Business

In the fourth quarter of 2023, AMD's data center business achieved revenue of USD 2.282 billion, a year-on-year increase of 37.9%, which is basically in line with market expectations (USD 2.3 billion). This is mainly due to the increase in sales of the company's fourth-generation EPYCTM (Milan) CPUs and AMD Instinct GPUs.

Currently, Microsoft, Meta, Oracle, and other cloud providers have announced the deployment of MI300X; Dell Technologies, HPE, Lenovo, Supermicro, and others have announced the launch of the new AMD Instinct MI300 enterprise and HPC platforms.

2.2 Client Business

In the fourth quarter of 2023, AMD's client business achieved revenue of USD 1.461 billion, a year-on-year growth of 61.8%, which is lower than market expectations (USD 1.516 billion). The year-on-year growth of the client business is due to the increase in sales of the Ryzen 7000 series CPUs. However, the sequential growth rate has slowed down significantly, as downstream demand has weakened after inventory replenishment in the industry chain.

2.3 Gaming Business

AMD's gaming business achieved revenue of $1.368 billion in the fourth quarter of 2023, a year-on-year decline of 16.8%, slightly better than market expectations ($1.246 billion). The decline in gaming business was influenced by the decline in revenue from certain semi-custom businesses. Dolphin Research believes that previously, gaming graphics card manufacturers were mainly driven by inventory replenishment demand, but the weak downstream demand has affected the sustainability of shipments.

2.4 Embedded Business

AMD's embedded business achieved revenue of $1.057 billion in the fourth quarter of 2023, a year-on-year decline of 24.3%, in line with market expectations ($1.062 billion). The company's embedded business is mainly driven by the previously acquired Xilinx, and this quarter was mainly affected by the decline in the communication market, with current customers mainly focused on inventory digestion.