AMD Earnings Preview: Market Focuses on AI Chips, Q4 Revenue Expected to Slightly Exceed Expectations

This article is compiled from the Alpha research report.

AMD will release its fourth-quarter earnings report after the market closes on January 30th, Eastern Time. How does AMD's fourth-quarter outlook look? Let's first take a look at AMD's business model:

1. Analysis of AMD's Business Model

AMD was founded in 1969 and is headquartered in Sunnyvale, California. It primarily designs and manufactures microprocessors and graphics chips for computing and other applications. AMD's business can be divided into four main segments: data center, gaming, client, and embedded.

The data center segment focuses on products for cloud computing, enterprise, and high-performance computing, including the Instinct MI GPU accelerator, AI components in Xilinx, and Pensando's DPU products.

The gaming segment mainly involves the semi-custom SOC business for game console manufacturers (such as PS5, Xbox), as well as consumer-grade Radeon graphics cards and RadeonPro graphics cards for workstations.

The client segment includes Ryzen and Athlon processors for desktop and laptop computers, as well as Threadripper PRO processors and Ryzen Pro processors for workstations.

The embedded segment includes Ryzen and Athlon embedded processors, as well as Xilinx's ALVEO, VERSAL, and ZYNQ series products, targeting users in healthcare, industrial, robotics, automotive, computer vision, and other fields.

2. Review of AMD's Third Quarter: YoY Revenue Growth

AMD's performance in the third quarter was mixed, with revenue showing signs of recovery. Thanks to strong PC demand trends and growth in the data center segment, AMD's revenue finally saw an increase in the third quarter after two consecutive quarters of decline. The revenue reached $5.8 billion, a YoY growth of 4%, exceeding the market's expectation of $5.71 billion. The midpoint of the company's revenue guidance range was $5.7 billion. On the other hand, the embedded and gaming segments were affected by industry cycles, resulting in a decline in revenue.

Breaking down the business segments, the rapid growth of the client segment was the main driver of the revenue increase in Q3. The client business revenue in Q3 2023 was $1.45 billion, a MoM growth of 46% and a YoY growth of 42%, mainly driven by strong demand and seasonal growth of the Ryzen 7000 series desktop and laptop processors.

The data center segment generated $1.6 billion in revenue, remaining flat YoY. This was due to the growth in sales of the fourth-generation AMD EPYC (Milan) CPUs being offset by the decline in sales of adaptive SoC data center products. However, the revenue increased by 21% MoM, as customers increased their purchases of the fourth-generation AMD EPYC (Milan) CPUs compared to the previous quarter.Game business revenue was $1.51 billion, down 5% MoM and 8% YoY. The main reason for the decline was the decrease in revenue from semi-custom SOC business (PS5, Xbox, etc.), partially offset by the growth in AMD Radeon GPU sales.

Embedded business revenue was $1.23 billion, down 15% MoM and 5% YoY. This was mainly due to the continued weakness in the expected trends in the communication infrastructure industry and inventory reduction.

III. Positive factors are expected to dominate in the fourth quarter, with revenue slightly exceeding expectations.

1. Let's first analyze the factors affecting the company's performance in the fourth quarter and look ahead to the fourth quarter of 2023. The company's business still has both joys and concerns:

For the positive factors in the fourth quarter, first, it is expected that the MI300 series chips will drive the growth of the data center business. The demand for the MI300 series GPUs is expected to continue to grow from the second half of 2024 to 2025, and AMD expects the MI300 series GPUs to contribute approximately $400 million in revenue in the fourth quarter of 2023. Second, there is a slight recovery in the PC industry trend. With the recovery in industry trends and the seasonal effect, AMD's client business is expected to further recover in the fourth quarter. According to the company's Q3 2023 financial report, AMD's client business continued to recover, with a MoM increase of 46% in revenue in the third quarter. According to market research firm IDC's statistics, global PC shipments in the third quarter of 2023 increased by 11% MoM, reaching 68.2 million units, maintaining growth for two consecutive quarters, and the growth trend is expected to continue in the fourth quarter.

As for the negative factors: The server industry may continue to be weak, affecting the revenue of the embedded business; at the same time, the game business revenue in the fourth quarter is expected to remain weak due to the drag from the semi-custom SOC performance.

2. After analyzing the factors affecting the company's performance in the fourth quarter, let's take a look at the specific outlook for the company's performance in the fourth quarter:

Overall, despite the cyclical pressures, the optimism for the growth of the company's AI business is expected to outweigh the cyclical risks. Many external analysts expect the revenue from AMD's MI300 in 2024 to exceed the guided $2 billion. Therefore, it is expected that AMD's main business revenue in Q4 2023 will reach $6.15 billion, up 6% MoM and 10% YoY, slightly higher than the company's guidance of $6.1 billion and the market's expectation of $6.13 billion. This is mainly due to the progress of the data center El Capitan project, the launch of EPYC products, and the seasonal recovery of the client business PC market.

Breaking down the specific businesses: Data center revenue is expected to increase by 46% MoM ($700 million increase) to reach $2.3 billion, including $400 million in additional revenue from MI300 and a 21% MoM increase in EPYC CPU business. With the recovery in industry trends and the seasonal effect, client revenue is expected to increase by 10% MoM, in line with performance guidance. Game revenue is expected to decrease by 23% MoM (double-digit decline as guided), and embedded revenue is expected to decrease by 15% MoM, with inventory adjustments expected to continue into the first quarter of 2024.In general, it is expected that the positive and negative factors in the fourth quarter of AMD will roughly offset each other, with the positive factors slightly dominating.

IV. Conclusion

In summary, the positive factors slightly dominate in the fourth quarter of 23, and AMD may slightly exceed market expectations in terms of sales in the fourth quarter, although the industry downturn in the gaming and embedded businesses may somewhat drag down performance growth. Specifically, in the PC sector, inventory normalization and seasonal factors in the fourth quarter should drive revenue and average selling prices (ASP) growth. In terms of data center business, it is expected that the continued performance of AMD's 4th generation EPYC™️ processors in the fourth quarter may even exceed guidance expectations. However, the lackluster performance in the gaming and embedded fields in the fourth quarter and first quarter may continue.

Finally, the expectations for the sales of the MI300GPU series products in 2024 are continuously rising, even surpassing the company's previously announced target of $2 billion, so the prospects and market acceptance of this product are worth continuous attention.