Justin Sullivan
Elevator Pitch
I continue to assign a Buy rating to Advanced Micro Devices, Inc.’s (NASDAQ:AMD) shares.
With my latest write-up for AMD, I come to the conclusion that the company’s share price has bottomed, which justifies my Buy investment rating for the stock. The market should have already priced in expectations of the company’s weak financial performance for the Q4 2022-Q2 2023 considering its current valuations. Looking ahead, AMD should be able to report positive bottom line growth on a YoY basis by the second half of 2023, and this will help to bring about a re-rating of its shares.
Why Has AMD’s Stock Price Dropped?
AMD’s stock price has dropped by -60% since the beginning of 2022. In my opinion, there are two major reasons for the company’s substantial share price fall in the first 10 months or so of the current year.
One key reason is that the market sees further downside for AMD’s bottom line in the short term, as weak economic conditions depress demand for servers, notebooks, and desktops. The investing community’s concerns are validated to some extent by AMD’s recent below-expectations quarterly financial performance. The company’s actual Q3 2022 non-GAAP adjusted earnings per share or EPS of $0.67 came in -4% lower than its prior bottom line guidance of $0.70 per share.
Another key reason is that investors hold the view that AMD’s shares were rather expensive at the start of this year, with its rich valuations having factored in most of the positives associated with the stock. On the first trading day of this year, January 3, 2022, AMD was trading at a very demanding consensus forward the next twelve months’ normalized P/E multiple of 47.9 times according to S&P Capital IQ data. Taking into account the valuation de-rating of growth stocks in a rising rate environment and expectations of negative earnings growth for AMD in the short term, it was inevitable that the company’s share price had to fall to levels implying a more reasonable earnings multiple.
AMD Stock Key Metrics
AMD disclosed the company’s financial performance for the third quarter of this year on November 1, 2022 after the market closed. It revealed a couple of metrics which suggests that AMD should turn the corner by the second half of 2023.
Firstly, the company guided for a lower (-1.1 percentage points on a QoQ basis adjusted for stock-based compensation) 51% non-GAAP adjusted gross profit margin in Q4 2022, but it did provide an indication of when it thinks that its gross margin will stabilize and recover again. AMD mentioned at the company’s Q3 2022 earnings briefing on the first day of November that it has “to work through what’s going on with the PC market” for the next few quarters up to “maybe early 2023” before “we come back and talk about the margins.” This seems to imply that AMD’s gross profit margins will remain weak till the early part of next year at the very least.
Secondly, the Data Center business was the star for AMD in the recent quarter, boasting a +45% YoY sales growth for Q3 2022. Notably, AMD highlighted at its third quarter investor call that “initial shipments of our next-generation Genoa CPU to select customers” was one of the key drivers, and guided that “the Genoa launch” in 2023 won’t “be supply constrained based on what we currently see.” In other words, AMD’s Data Center business will most probably benefit from a significant ramp-up in Genoa volumes next year, with supply expected to be less of an issue.
Thirdly, AMD’s guidance points to the company’s non-GAAP operating costs (adjusted for stock-based compensation) to increase by a modest +3% QoQ to $1,550 million in Q4 2022. This sends a positive signal that AMD is working hard at cost management, and the company’s actual operating expense reductions and profitability for 2023 might be better than what the market expects. It is worth noting AMD management’s comments at the recent quarterly earnings call that “we have multiple levers in OpEx (Operating Expenses)” and “are going to be very disciplined.”
My view of AMD’s financial outlook is aligned with Wall Street analysts’ consensus financial forecasts. The sell-side expects AMD to report negative YoY earnings growth for the Q4 2022-Q2 2023 period before returning to positive bottom line growth starting in Q3 2023.
Have Share Prices Hit A Bottom?
I take the view that AMD’s stock price has hit a bottom.
The market is a discounter of future expectations. There is a saying that the stock market leads the economy by as much as six to nine months. In that respect, it is reasonable to assume that AMD’s current share price and valuations should already factor in negative expectations regarding the company’s lackluster financial performance for the next few quarters.
As I highlighted in the preceding section, AMD should experience a significant turnaround in the latter half of next year when it resumes positive EPS growth in YoY terms again. As we move into late 2022 and early 2023, investors should gradually look beyond AMD’s short-term earnings weakness and start focusing on the company’s 2H 2023 earnings recovery.
Furthermore, AMD’s current valuations have also bottomed out. AMD’s consensus forward next twelve months’ normalized P/E multiple fell to a five-year trough of 14.3 times on September 30, 2022 as per S&P Capital IQ data. AMD’s forward P/E ratio is 18.7 times now, which is 61% below its P/E metric (47.9 times) at the start of the year. This is another sign that AMD’s stock price has reached its bottom.
What Is AMD’s Long-Term Outlook?
AMD’s long-term outlook is good with respect to the potential for market share gains going forward.
In my prior September 8, 2022 update for Advanced Micro Devices, I mentioned that “AMD’s stock is a good investment” considering that “it can outperform the broader semiconductor market with share gains.”
At its most recent Q3 2022 results briefing on November 1, 2022, AMD noted that the company expects to “gain share in both cloud and enterprise” segments of the Data Center business, and “certain segments” of “the desktop and notebook business” like premium, gaming, and commercial. This reinforces my favorable view of AMD’s long-term outlook on the basis that the company continues to be a market share gainer with its key businesses.
Is AMD Stock A Buy, Sell, Or Hold?
I leave my Buy rating for AMD unchanged. After assessing the company’s business outlook and valuations, my view is that AMD’s stock price has reached a bottom.
