AMD Q3 2024 Earnings Review: Performance Driven by Rapid Growth in Data Center Business | Moomoo Research

On October 29, after the U.S. stock market closed, AMD released its financial report for the third quarter of 2024. Despite the revenue for the quarter significantly exceeding market expectations, the company's forecast for future performance indicated that the growth rate of AI chip sales might slow down, leading to a drop of over 7% in its stock price during after-hours trading. Amidst widespread pressure on tech stocks, AMD's earnings report sparked discussions among investors: while the rapid growth of its data center business has set new revenue records for the company, the market is more concerned about whether this growth can be sustained.

Next, we will analyze AMD's strong performance in its data center business, the continued growth in profit margins, and the challenges and performance guidance it faces in the future, delving into the driving factors behind its performance and potential growth momentum.

In Q3 2024, the company's revenue reached $6.82 billion, a record high, up 18% year-over-year and 17% sequentially, landing at the upper end of the company's guidance ($6.4 billion to $7 billion), and exceeding the market expectation of $6.71 billion. Notably, the data center business achieved a record high revenue of $3.55 billion, a 122% year-over-year increase and a 25% sequential increase, slightly surpassing market expectations of $3.52 billion, primarily due to strong growth in AMD Instinct GPU shipments and an increase in AMD EPYC CPU sales.

1. Strong Current Demand for AI Chips and Continued Capital Expenditure Growth from Downstream Customers.

AMD's key customers include Microsoft, Meta, Oracle, HP, and Sony. For example, Microsoft is one of AMD's important clients, especially since the new generation of consoles utilizes AMD's APU processors, contributing significant revenue to AMD. Given the continued strong demand for AI-related chips in the market, AMD, as one of the major chip suppliers, naturally benefits from this trend.

2. AMD's Market Share in Cloud Servers Expected to Continue Growing.

(1) In terms of CPUs, with the acceleration of enterprise business, the company expanded its server CPU market share this quarter, as cloud providers increased their usage of EPYC CPUs in their infrastructure. Microsoft, AWS, and others launched or expanded their products based on EPYC processors this quarter, with public cloud instances growing by 20% year-over-year to over 950.

(2) In terms of GPUs, the revenue from data center GPUs saw a significant increase as cloud, OEM, and AI customers expanded their adoption of MI300X. Microsoft and Meta increased their usage of MI300X accelerators this quarter to support their internal workloads. AMD officially launched the AMD Instinct MI325X GPU equipped with the new generation of AI chips at the Advancing AI 2024 conference, which competes with Nvidia's H200 GPU set to be released in November 2023, with computing performance about 1.3 times that of the H200. The MI325X is expected to officially go into production in Q4 of this year and start delivering to customers in Q1 of next year, with data center GPU revenue expected to exceed $5 billion in 2024, up from the $4.5 billion forecasted in July.

In other business segments, Q3 2024 client business revenue was $1.9 billion, up 29% year-over-year and 26% sequentially, primarily driven by demand for the "Zen 5" AMD Ryzen processors. Revenue from gaming and embedded businesses decreased by 69% and 25% year-over-year, respectively, indicating average performance.

Chart: Revenue Growth by Business Segment for AMD (in millions of dollars)

Source: Bloomberg

The company's profit margins have continued to improve. This quarter, the Non-GAAP gross margin was 54%, an increase of 3 percentage points from the same period last year (51%) and up 1 percentage point from the previous quarter (52%). In terms of operating profit, the adjusted operating profit revenue was $1.72 billion, a year-over-year increase of 34% and a sequential increase of 36%, reflecting a significant acceleration compared to the previous quarter. The adjusted net profit was $1.5 billion, up 33% year-over-year and 34% sequentially; the adjusted diluted EPS was $0.92, up 31% year-over-year and 33% sequentially.

The growth in the company's profits can be attributed to two main factors: first, the increase in revenue, and second, optimization and control of costs.

From the perspective of revenue growth, AMD has shown strong growth momentum in both data center and client businesses, which has helped enhance gross margins. In terms of cost control, the company's capital expenditures decreased both year-over-year and quarter-over-quarter this quarter. Additionally, AMD's R&D expenses have historically accounted for about 25% of revenue, and this quarter saw a significant reduction in the R&D expense ratio both year-over-year and quarter-over-quarter, which contributed to the expansion of operating profit margins.

Chart: AMD Adjusted Profit Situation (in millions of dollars)

Source: Bloomberg

The company expects Q4 revenue to be between $7.2 billion and $7.8 billion, with a midpoint of $7.5 billion, reflecting a year-over-year increase of about 22% and a sequential increase of about 10%. However, since analysts anticipated a revenue midpoint of $7.55 billion, the company's Q4 revenue guidance was slightly below market expectations, causing the stock price to drop over 7% in after-hours trading.

The guidance for Q4 revenue falling short of expectations is likely due to supply chain constraints. Due to strong demand for AI, TSMC, the world’s largest chip foundry, warned in July that global AI chip capacity would remain extremely tight until 2025, signaling significant supply challenges for these advanced process semiconductors. NVIDIA's Blackwell chip has also been negatively impacted by supply chain issues.

Despite this, AI demand is expected to remain robust. AMD’s management has raised the 2024 AI chip revenue forecast to over $5 billion, up from the previously adjusted forecast of $4.5 billion in the Q2 earnings report. As the second-largest AI chip supplier after NVIDIA, the company is poised to benefit from increased demand for AI chips from downstream customers.

In terms of profits, the company expects a Q4 Non-GAAP gross margin of about 54%, a slight improvement over Q3. Looking ahead to 2024, the improvement in gross margins is expected to be primarily driven by an optimized business mix, with an increased revenue share from the data center business contributing to higher gross margins.

Overall, AMD's performance in this earnings report was outstanding, primarily driven by the rapid growth of its data center business. At the same time, the company's profit margins have continued to expand, benefiting from increased revenue scale, optimized product mix, and cost control. Following the earnings release, the company’s stock price fell more than 7%, mainly due to the Q4 revenue guidance midpoint falling short of market expectations, likely caused by supply chain constraints. Given the continued strong demand for AI, the company, as the second-largest AI chip supplier after NVIDIA, is expected to benefit from the growth in AI chip demand from downstream customers once supply chains improve.

Moreover, NVIDIA’s earnings report is set to be released after the market closes on November 20, Eastern Time, and investors should keep an eye on that.

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