AMD Q1 Earnings Preview: Revenue Expected to be Lackluster in the Off-Season, but Long-Term Growth Prospects Remain Promising

According to Bloomberg data, it is widely expected that AMD's total revenue for Q1 will be around $5.45 billion, representing a YoY increase of 1.8% and a QoQ decrease of 11.6%. Earnings per share are expected to be $0.61, which is essentially flat compared to the same period last year at $0.60 per share, but a QoQ decrease of 20%.

AMD was founded in 1969 and is headquartered in Sunnyvale, California. It is a global semiconductor technology company that provides central processing units (CPU), graphics processing units (GPU), chipsets, and similar computing products. The company's products are used in various computing platforms, including desktops, laptops, gaming consoles, and various commercial application servers and processors. AMD serves original equipment and design manufacturers, cloud service providers, system integrators, independent distributors, and AIB manufacturers through its direct sales team and sales representatives.

AMD's data center business mainly includes products for cloud computing, enterprise, and high-performance computing. This includes the Instinct MI GPU accelerator, the AI portion in Xilinx, and Pensando's DPU products.

The gaming business mainly involves the customization of semi-custom SOC for game console manufacturers (such as PS5, Xbox, etc.), as well as the consumer-level Radeon series graphics cards and the Radeon Pro series graphics cards for workstations.

In the client business, it includes the Ryzen and Athlon processors for personal desktops and laptops, as well as the Threadripper PRO processor and Ryzen Pro processor for workstations.

In the embedded business, it includes the Ryzen and Athlon embedded processors, as well as Xilinx's ALVEO, VERSAL, and ZYNQ series products, which are mainly targeted at users in the healthcare, industrial, robotics, automotive, computer vision, and other fields.

Similar to AMD's business, there is another technology giant, NVIDIA. It can be said that any enterprise that wants to develop large-scale generative models will be a customer of these two companies, and this demand will only increase over time.

Before predicting the revenue situation for this quarter, let's first review AMD's performance in the previous quarter:

In Q4 2023, AMD's total revenue increased by 10% YoY to $6.2 billion, with growth in both data center and client businesses, up 38% and 62% respectively, but declines in gaming and embedded businesses.

According to the financial report, the growth in the data center business came from the strong growth of AMD Instinct™ GPU and 4th generation AMD EPYC™ CPU, while the growth in the client business came from the increase in sales of AMD Ryzen™ 7000 series CPU. Overall, AI solutions showed excellent growth momentum in the previous quarter. The main reason for the decline in the gaming business was the decline in revenue from the semi-customized business group, while the decline in revenue from the embedded business was mainly due to customers reducing inventory.

Therefore, whether AI can continue to grow steadily, and whether gaming and embedded businesses will continue to drag down the performance will be the focus of this financial report.

So, what are the market expectations for AMD's revenue performance this quarter? According to Bloomberg's consensus estimates, in Q1 2024, AMD is expected to have:

Total revenue of approximately $5.449 billion, which represents a YoY increase of 1.8% and a QoQ decrease of 11.6%. The main reason for the decrease is that Q1 is traditionally a slow season for the chip industry, and the entire semiconductor industry is expected to have a relatively flat performance in Q1, with reduced transactions compared to the previous quarter.

Figure: Changes in global PC shipments (in millions)

As shown in the chart, the development of the PC industry exhibits clear cyclical patterns, which can be influenced by factors such as school schedules and holidays, resulting in significant differences between peak and off-peak seasons. As the core upstream industry of the PC industry, the semiconductor industry will also undergo corresponding cyclical changes.

Looking at AMD's business segments, Wall Street estimates that the company's advantages in the data center and AI fields may be partially offset by the cyclical challenges of other businesses, and the fundamentals are showing a polarization:

1. The revenue from the data center business is estimated to be around $2.3 billion, representing a YoY increase of 78%, and remaining relatively flat compared to the previous quarter. The main reason is that the seasonal decline in the PC industry will be offset by the strong growth of data center GPUs. It is expected that the supply of MI300 (high-bandwidth memory chips) may support a turnover of $5-6 billion, with sufficient supply capacity and market demand, and is expected to exceed the cautious forecast of AI revenue by the company's management in the 2023 annual report.

2. In addition to the data center business, the market predicts that AMD's client business revenue will be $1.288 billion, representing a YoY increase of up to 74.35%, but a QoQ decrease of 11.8%. This is also the second consecutive quarter that the client business has become AMD's second-largest business. The optimistic part of this expectation mainly comes from the surge in AI PCs and the recovery of customers. With the launch of new GPUs, AMD is expected to stimulate market demand and attract gamers and high-performance computer users to upgrade their systems. However, it will also be affected by the seasonal impact on the PC end, resulting in a QoQ decrease.

3. The market's expectations for AMD's gaming and embedded businesses are relatively pessimistic, with expected revenues of $0.965 billion and $0.922 billion, respectively, representing YoY decreases of 45% and 40%, and continuing to decline compared to the previous period. This is mainly due to ongoing inventory adjustments. The semiconductor industry is undergoing a structural transformation, and demand for high-density, high-performance products will remain strong. However, there is a serious excess capacity problem for low-end products.

Figure: AMD's total revenue and revenue changes by business (unit: million US dollars)

Overall, AMD's Q1 revenue is expected to decline QoQ from its outstanding performance in the previous quarter due to seasonal factors in the industry, but a YoY increase in the single digits is expected. Performance is expected to be satisfactory to the market.

In terms of profit, according to Bloomberg's consensus estimates, AMD's gross margin in Q1 2024 is expected to be around 50.4%, representing a YoY increase of 14.56% and a QoQ increase of 7.2%. This means that the overall gross margin is expected to improve due to the driving force of pricing power and a more value-added product mix.

However, with the introduction of new AI products, AMD's R&D expenses have increased, and R&D expenses in Q1 2024 are expected to be around $1.5 billion, representing a YoY increase of 6.28%. Therefore, the market expects AMD's Q1 2024 net profit to be $989 million, representing a YoY increase of 1.99% and a QoQ decrease of 20.8%. This means that while the company's gross profit is expected to rise, net profit may decline due to the increase in R&D expenses and the decrease in revenue.

It is worth noting that AMD has issued new shares to raise funds several times in the past few months, raising a total of about $3.8 billion. Currently, Bloomberg estimates that AMD's Q1 2024 free cash flow will be around $2.224 billion, representing a YoY increase of 578% and a QoQ increase of 819%. This move is expected to directly promote the expansion of the company's production capacity and increase its profitability, alleviating the significant problem of $170 million FCF at the end of the previous quarter. In the medium and long term, the company's growth prospects should be optimistic.

Like other technology companies, AMD generally does not pay dividends to shareholders, but reinvests profits in research and development to improve its competitive advantage. Therefore, investors can evaluate its financial health and growth potential through its earnings reports rather than dividends.

Overall, the market has relatively consistent expectations for AMD's Q1 performance, which is generally in line with expectations during the off-season of the overall semiconductor industry. The main focus is on whether the guidance for the next quarter and long-term will satisfy the market, as well as whether the GPU segment will continue to improve the full-year revenue guidance.

Currently, from a valuation perspective, analysts are generally bullish on AMD. 78% of analysts rate the stock as "buy," indicating positive market sentiment. The one-year price target range is wide, from a low of $140 to a high of $270.00, with a median forecast of $204.96. This range signifies varying degrees of bullish sentiment among analysts, suggesting significant growth potential but also acknowledging possible volatility.

As of the afternoon of April 30th Beijing time, AMD Price-To-Earnings Ratio has reached 302, which is a company with a relatively high valuation. As the popularity of AI dissipates, AMD may face certain valuation pressure.

At the same time, due to the large fluctuations in the US stock market during this financial report season, even though the market's expectations for AMD are still good at present, the market's reaction to the company's financial report is more stringent and intense. It is recommended that investors do hedging to prevent large-scale losses.