Strategies for Capitalizing on Advanced Micro Devices (AMD) Earnings Momentum

May 03, 2024 at 05:11 AM EDT

Despite an impressive first quarter earnings report, shares of Advanced Micro Devices (AMD) are in a downward spiral. Let's delve into the intricacies of AMD's current market dynamics to uncover the underlying reasons behind this unexpected turn of events...

Advanced Micro Devices, Inc. (AMD), the prominent chip giant, unveiled its fiscal first-quarter earnings on Tuesday, April 30, 2024, surpassing analysts' predictions both in revenue and earnings. However, the company's guidance for the current quarter (ending June 2024) fell short of market expectations, leading to a decline in its stock price. Shares of the chipmaker plummeted by over 6% during early trading on Wednesday, May 1, 2024.

In this article, I have discussed why it could be wise to avoid the stock despite the solid earnings results.

AMD’s stock has fallen 18.2% over the past month and 17.7% over the past three months, closing the last trading session at $146.16. It currently trades below its 50-day and 100-day simple moving averages of $175.96 and $166.32, indicating a downtrend.

In the first quarter (ended March 30, 2024), AMD posted a revenue of $5.80 billion. Zooming into segment performance, its Data Center segment stood out, marking a remarkable 80% year-over-year revenue surge to $2.30 billion. The Client segment followed suit, boasting impressive growth as revenue reached $1.40 billion, an 85% uptick from the previous year, driven mainly by strong sales of the AMD Ryzen 8000 Series processors.

On the other hand, its Gaming segment faced challenges, witnessing a substantial 48% year-over-year decrease in revenue, attributed to lower semi-custom revenue and AMD Radeon GPU sales. The Embedded segment similarly faced a decline, with revenue dropping by 46% year-over-year to $846 million, as customers continued to manage their inventory levels.

Looking ahead, AMD anticipates revenue to hit approximately $5.70 billion, with a potential variance of $300 million either way in the fiscal 2024 second quarter (ending June 2024). Additionally, its non-GAAP gross margin is expected to be around 53%.

However, Wall Street's expectations for AI chip sales weren't met by AMD. Ben Bajarin, CEO of consulting firm Creative Strategies, said., "I think investors wanted to see a stronger demand pipeline from AI-related products, but it is a slower ramp for them against Nvidia, and perhaps they aren't making as much progress as the street hopes."

What lies ahead? Take a look at its fundamentals:

Budding Rivalry in the Market

In the semiconductor arena, AMD recently challenged industry leader NVIDIA Corporation’s (NVDA) AI computing dominance with its Instinct MI300 accelerator chips. This puts them in direct competition with NVDA's H100 line, despite no comments from NVDA. However, NVDA leads with the H200 line, and its upcoming Blackwell architecture chips further intensify the rivalry, setting the stage for an innovation-driven battle for market leadership.

Sound Financials

AMD’s revenue for the fiscal first quarter ended March 30, 2024, rose 4.2% year-over-year to $5.80 billion. Its non-GAAP gross profit increased 7% over the prior-year quarter to $2.86 billion. The company’s non-GAAP operating expenses rose 9.7% year-over-year to $1.74 billion. Also, its non-GAAP net income increased 4.4% year-over-year to $1.01 billion. In addition, its non-GAAP EPS came in at $0.62, representing an increase of 3.3% year-over-year.

Valuation Metrics Alarmingly Above Industry Norms

AMD's forward P/S ratio stands at 9.24x, 242.8% above the industry average of 2.70x. Similarly, its forward EV/Sales ratio of 9.12x exceeds the industry norm by 230.8%, and its forward P/E ratio of 95.27x is 239.1% higher than the industry average of 28.09x. Moreover, AMD's forward EV/EBITDA multiple of 46.37 is 220.9% greater than the industry average of 14.45.

Weak Profitability

AMD’s trailing-12-month EBIT margin of 2.55% is 42.7% lower than the 4.45% industry average. The stock’s 0.34x trailing-12-month asset turnover ratio is 44.9% lower than the industry average of 0.61x. AMD’s trailing-12-month ROCE and ROTC of 2.01% and 0.62% are 34.8% and 69.6% lower than the 3.09% and 2.05% industry average.

POWR Ratings Reflect Bleak Prospects

AMD has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMD has a D grade for Value, in sync with its stretched valuation. Also, its 1.78 beta justifies its D grade for Stability.

AMD is ranked #75 out of 91 stocks in the Semiconductor & Wireless Chip industry.

Click here to access AMD’s Growth, Momentum, Quality, and Sentiment ratings.

Bottom Line

In the volatile semiconductor market, AMD's fiscal first-quarter earnings surpassed expectations, yet its guidance disappointment led to a stock decline.

Given AMD's cautious guidance and tough competition from NVDA, the wisest move post-earnings could be to avoid the stock. Additionally, concerns loom over stretched valuation metrics, weak profit margins, and a high beta value, highlighting potential risks for investors.

Stocks to Consider Instead of Advanced Micro Devices, Inc. (AMD)

The odds of AMD outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A (Strong Buy) and B-rated (Buy) stocks from the Semiconductor & Wireless Chip industry instead:

Everspin Technologies, Inc. (MRAM)

ChipMOS TECHNOLOGIES INC. (IMOS)

Qualcomm Inc. (QCOM)

Access top-rated stocks in the Semiconductor & Wireless Chip industry here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

AMD shares rose $1.40 (+0.96%) in premarket trading Friday. Year-to-date, AMD has gained 0.13%, versus a 7.80% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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