The chipmaker’s cyclical slowdown might end this year.
AMD (AMD 4.34%) posted its fourth-quarter report on Jan. 31. The chipmaker’s revenue rose 16% year over year to $5.6 billion, which beat analysts’ estimates by $80 million. Its adjusted earnings per share fell 25% to $0.69, but still cleared the consensus forecast by two cents.
AMD’s stock rose slightly after that report, which looked a lot better than Intel’s disastrous numbers, but its stock remains down 31% over the past 12 months. Will it bounce back this year as the chip market stabilizes?
AMD’s revenue rose 44% to $23.6 billion in 2022, but a lot of that growth came from its acquisition of the programmable chipmaker Xilinx last February. After that acquisition, AMD expanded its two segments (Computing and Graphics and Enterprise, Embedded, and Semi-Custom) to four segments (Data Center, Client, Gaming, and Embedded) in the second quarter of 2022.
AMD’s data center segment, which sells its central processing units (CPUs), graphics processing units (GPUs), and Xilinx chips for servers, accounted for 26% of its 2022 revenue. The client segment, which sells its PC-oriented CPUs, generated another 26% of its revenue. The gaming segment, which sells its Radeon GPUs for PCs and custom accelerated processing units (APUs) for gaming consoles, accounted for 29%. The remaining 19% came from its embedded segment, which sells Xilinx’s embedded chips for non-server markets alongside AMD’s other embedded chips.
As this table illustrates, the stronger growth of AMD’s data center and embedded businesses (which both benefited from its acquisition of Xilinx) offset the post-pandemic declines of its client and gaming businesses over the past three quarters.
Sales of new PCs soared during the pandemic lockdowns as more people upgraded their systems for online classes, remote work, and gaming. But that demand cooled off as the lockdowns ended, and the entire PC market now faces a rough cyclical slowdown. Inflation is exacerbating that decline by discouraging people from making big-ticket purchases.
That pressure also squeezed the gaming market, which had flourished throughout the crisis as more people stayed at home. As the pandemic tailwinds faded, its sales of gaming GPUs for PCs cooled off and offset its stronger sales of custom APUs (which merge CPUs and GPUs) for the PS5 and Xbox Series S and X consoles. Macro headwinds also throttled the growth of the broader data center market as large companies reined in their spending.
But fortunately for AMD, its acquisition of Xilinx offset a lot of that pressure. It also shielded it from the full slowdown of the PC and data center markets, which caused Intel’s adjusted revenue to decline 16% in 2022.
AMD still expects its revenue to dip 10% year over year in the first quarter of 2023 as the PC and gaming markets remain soft, but that’s still a lot better than Intel’s forecast for a 37% to 43% revenue decline for the same period.
Unlike Intel, which still manufactures most of its own chips, AMD is a fabless chipmaker, which outsources its production to third-party foundries like TSMC. That approach eliminates the need for costly plant upgrades to produce smaller and denser chips.
That’s why AMD’s adjusted operating margin still expanded more than two percentage points to 26.9% in 2022, while Intel’s adjusted operating margin plunged nearly 20 percentage points to 12.6%. So as long as TSMC remains about a generation ahead of Intel in the costly “process race” to manufacture smaller chips, AMD will likely keep producing cheaper and more power-efficient CPUs than Intel. AMD’s Radeon GPUs should also keep pace with Nvidia’s GeForce GPUs, which are also fabless chips manufactured by TSMC, Samsung, and other third-party foundries.
Analysts expect AMD’s revenue and adjusted earnings to rise 5% and 2%, respectively, in 2023 as the chip market stabilizes in the second half of the year. Based on those expectations, which we should take with a grain of salt, AMD trades at 20 times forward earnings. That’s only slightly higher than Intel’s forward price-to-earnings ratio of 18.
AMD’s stock isn’t dirt cheap yet, but the company is in a lot better shape than Intel. I expect AMD’s stock to stagnate for the first half of the year as the semiconductor market remains soft, but I think it could recover quickly in the second half if the PC and gaming markets finally stabilize. AMD’s stock isn’t a screaming buy yet, but it could easily outperform Intel and other chipmakers, while gradually climbing higher over the next 12 months.