AMD Plunges 20% Post-Earnings: Is It Time to Buy the Dip?

On August 6th, Beijing time, after the U.S. stock market closed, AMD released its financial report for the fourth quarter of fiscal year 2024 (calendar Q2 2024) and announced a stock split plan. The company achieved revenue of $5.31 billion this quarter, a year-over-year increase of 143.6%, which was roughly in line with market expectations. However, the Non-GAAP diluted EPS was only $6.25, a year-over-year increase of 78.1%, which was significantly below both the company's and the market's expectations. Following the earnings release, the company's stock price plummeted by over 20%.

AMD is a technology company focused on high-performance servers. The company offers a broad range of advanced servers, storage solutions, networking equipment, and green computing technology, with revenue from servers and storage systems accounting for more than 95% of its total income. AMD's products and services are primarily targeted at data centers, cloud computing, artificial intelligence, big data analytics, high-performance computing (HPC), and the Internet of Things (IoT). The company closely collaborates with tech giants like NVIDIA and Samsung, aiming to maximize performance and energy efficiency.

Thanks to record-breaking demand for AI infrastructure, the company’s revenue for Q4 FY2024 grew by 143.6% year-over-year to $5.31 billion, with revenue from servers and storage systems increasing by 147.8% year-over-year to $5.036 billion. AMD's performance heavily relies on orders from clients such as NVIDIA, as well as on the capital expenditure growth of downstream cloud computing providers.

Due to the delay in the shipment of NVIDIA's Blackwell GPUs to the first quarter of 2025, AMD may face some growth pressure in the first half of FY2025. Regarding downstream capital expenditures, based on the financial reports disclosed by various tech companies, the growth in capital expenditure remains robust, and the backlog of company orders has reached an all-time high. However, the relatively low input-output ratio of downstream tech companies might raise doubts about the sustainability of large capital expenditures. Should downstream demand slow down, AMD's performance could be significantly impacted.

Source: Company Announcements

Overall, the company is relatively optimistic about its future revenue guidance. According to the company's performance guidance, revenue for Q1 FY2025 is expected to reach the range of $6 to $7 billion, representing a year-over-year growth rate of approximately 183% to 230%. Revenue for the entire FY2025 is expected to reach the range of $26 to $30 billion, representing a year-over-year growth rate of approximately 74% to 101%, which is a slowdown compared to the 110% revenue growth in FY2024.

Despite rapid revenue growth, the company's profitability has significantly lagged behind. This quarter, the company's gross margin was 11.3%, a sequential decline of 430 basis points from the previous quarter and a year-over-year decline of 580 basis points. The significant drop in gross margin can be attributed to several factors:

The gross margins of OEM equipment and large data center businesses are relatively low, meaning that AI servers have relatively low gross margins.

The production costs for the new DLC technology are high, specifically the initial costs associated with ramping up the production of new DLC AI GPU clusters.

Source: Company Announcements

The decline in gross margin is a key factor behind the drop in the company's operating margin and EPS. This quarter, the company's operating margin was 7.8%, down significantly from 11.3% in the previous quarter, while operating expenses remained relatively stable. The Non-GAAP EPS was only $6.25, well below the company's guidance of $7.62 to $8.42.

Source: Company Announcements

In the server and data center market, AMD faces intense competition from several large technology companies, including but not limited to Dell Technologies, HP, Lenovo, and Cisco Systems. Due to the fierce competition in the AI server industry and relatively low industry barriers, service providers are adopting price-cutting strategies to gain more market share. In the short term, given the ongoing intense competition in the AI server market, it will be difficult for the company to increase its product prices. As the proportion of large customers continues to grow, the company’s gross margin will remain under significant pressure.

The company's cash flow situation is not promising, and shareholder returns are unlikely in the short term. Due to the continuous growth in inventory and accounts receivable, both operating cash flow and free cash flow were negative this quarter. As of the end of June 2024, the company's total cash and cash equivalents amounted to $1.67 billion, which is less than its total bank debt and convertible notes (totaling $2.174 billion). Overall, the company still faces a cash flow shortage and needs to raise additional funds. According to management's disclosures, the company is primarily considering obtaining funds through unsecured debt.

Source: Company Announcements

Due to Tight Financials, Historical High-Priced Secondary Offerings to Raise Funds, Be Wary of Potential Dilution of Shareholder Equity

Given the company's tight financial situation, it has historically raised funds through high-priced secondary offerings, which could lead to shareholder equity dilution if repeated. Additionally, AMD has a history of financial fraud, for which it was delisted and fined by the SEC. Investors should be cautious of these risks.

Driven by AI orders, the company's revenue growth rate remains high, although gross margin will remain under pressure in the short term. According to the company's disclosure, revenue for FY2025 is expected to reach the range of $26 to $30 billion, representing a year-over-year growth rate of approximately 74% to 101%. Considering that gross margin is expected to return to the normal level of 14% to 17% by the end of FY2025, net profit for FY2025 is anticipated to achieve a growth rate of 53% to 77%.

Currently, the company's total market capitalization is $28.851 billion, with a forward P/E ratio for FY2025 of approximately 12x to 14x. If the company can meet its revenue guidance and restore its gross margin to normal levels, the earnings growth rate should justify the current valuation. Compared to the industry, Dell and HP are expected to have single-digit net profit growth rates for FY2025, with forward P/E ratios of 11.4x and 8.7x, respectively. Therefore, AMD's valuation of 12x to 14x, given its high growth rate, does not seem overly high.

Due to the company's unfavorable cash flow situation and negative free cash flow, shareholder returns are unlikely in the short term. Given the company's tight financials and history of raising funds through high-priced secondary offerings, there is a risk of shareholder equity dilution if such events recur.

The recovery of the company's gross margin needs to be verified in future financial reports. Investors are advised to monitor the improvement in gross margin and adopt different investment strategies based on the situation:

If the gross margin can gradually return to normal levels, and net profit growth can maintain a high rate of around 53% to 77%, the current valuation is not high, and investors may consider buying call options or selling put options.

If there are no signs of gross margin recovery, net profit growth will slow down more than expected, and the stock price may have room for a pullback. In this case, investors may consider buying puts to hedge.