The good news: Advanced Micro Devices (AMD) first-quarter beat on Tuesday revealed a bottom in its struggling PC business. The not-as-good news: the chipmaker won’t resume the kind of growth we’re used to until the second half of the year.

• Revenue fell 9% year over year to $5.35 billion, but outpaced the Street’s expectation of $5.3 billion, according to estimates compiled by Refinitiv.

• Adjusted earnings-per-share (EPS) fell 47% on annual basis, to 60 cents a share, slightly ahead of the 56 cents forecasted by analysts.

Summary

AMD’s better-than-expected results in the gaming and embedded (processors for industrial and commercial applications) segments of its business more than offset weakness in its data center and PC segments. However, the forward sales guidance fell short of expectations on the Street, sending shares down over 8% this morning. 

We were relieved to hear that management still views the first quarter as the bottom of the client segment (PC market) thanks to its inventory reduction efforts. Still our read, based on management’s call with investors, is that this is more of a second-half 2023 into 2024 story. Here’s why: Management sees some “modest” data center growth in the second quarter, but demand remains suppressed as a result of ongoing cloud optimization efforts. This isn’t surprising given similar commentary last week from Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN).

In the second half of this year, we should see a stronger Genoa ramp and the beginning of the Bergamo chip ramp — two key growth drivers. In the fourth quarter, we’ll also see the ramp of AMD’s MI300, “the world’s first integrated data center CPU and GPU” designed for high-performance computing and AI workloads.

We believe this is an incredible buying opportunity for AMD, especially if the stock approaches the 200-day moving average of roughly $80/share. We look forward to a rebound in growth and continued market share gains for its data center business in the second half.

Fourth-quarter segment results

• Data center revenues were largely unchanged versus the year-ago period as growth in cloud sales was offset by lower enterprise sales. On the call, management noted that the largest cloud providers further expanded their AMD deployments during the quarter. Unfortunately, this growth was offset by softer demand in enterprise, which management attributed to macroeconomic uncertainty.

• Client sales continued to be plagued by management’s efforts to reduce channel inventory. Due to an inventory glut, the company has been shipping product “significantly below consumption” to achieve this goal. On a more positive note, management reiterated the first quarter of the year to have been the bottom for AMD’s client processor business.

• Gaming revenue fell as lower gaming graphics were only partially offset by higher semi-custom chips that sell into video game consoles (PlayStation and Xbox).

• Embedded revenues were up significantly year over year. While much of that is simply a function of adding the Xilinx business to the portfolio in the middle of the quarter last year — the deal closed mid-February 2022 — management noted increased demand from industrial, vision and healthcare, test and emulation, communications, aerospace and defense and automotive customers.

Outlook

AMD provided an outlook for the second quarter of 2023 that was slightly below expectations.

Management expects second-quarter revenues to be approximately $5.3 billion, give or take $300 million, below the $5.48 billion expected by the Street. Adjusted gross margin is expected to be about 50%, in line with expectations.

Beyond those numbers, management said in its data center business that server demand is expected to remain mixed in the second quarter, but expect growth in both cloud and enterprise in the second half. Client segment performance is expected to improve going forward, with growth in the second quarter followed up by a seasonally stronger back half of the year thanks to efforts to clear channel inventories. Still, the team is anticipating a roughly 10% annual decline in the addressable PC market for the full year.

Ultimately management expects sequential growth in client and data center to be offset by “modest declines” in gaming and embedded.

Most importantly, management made clear that a lot of necessary work was done in the first half of the year, and as a result the company is in a position to realize a strong second half of 2023 and beyond as new products launch and production ramps. Management, and us at the Club, still believes that the competitive strength of AMD’s product portfolio puts it in a position to gain more share in data center.

Management said the future looks brighter. “We are in the very early stages of the AI computing era and the rate of adoption and growth is faster than any other in history.” AI requires a massive increase in computing performance and the team believes AMD can deliver thanks to a broad product portfolio and deep customer relations across large and diverse end markets.