AMD Stock: A Compelling Buy at Current Levels

AMD Stock


Tomorrow after the bell, Advanced Micro Devices, Inc. (NASDAQ:AMD) will tell us how they did in the fourth quarter of their fiscal year. The current recession has hurt semiconductor companies all over the world, and investors are eagerly waiting for AMD’s next earnings report to see how its sales are affected by the recession. But investors may also want to keep an eye on AMD’s purchase obligations, inventory levels, segment financials, and the company’s management’s outlook for the coming year. These things will make it clearer that the chipmaker is in muddy waters and may have an effect on where its shares go next.

Key Performance Indicators

First of all, I want to say that high inflation and rising interest rates have made it harder for people to buy computers. Gartner and Canalys, two different research firms, both came to the same conclusion that PC sales dropped in the fourth quarter of CY22. So, even though AMD has been gaining market share at the expense of Intel Corporation (NASDAQ:INTC) and Nvidia Corporation (NASDAQ:NVDA), it’s likely that these gains won’t be enough to make up for the weak demand for PCs across the industry this time.

All we know is that AMD could fall victim to these macroeconomic headwinds and have trouble making money for at least a quarter or two. We can get more information about this ongoing change by looking at how much AMD has in stock. A sharp rise in the chipmaker’s inventory number would mean that its managers misjudged the demand for computing products, overstocked on inventory, and may now have to write off some of that inventory.

But it would be best if AMD’s inventory levels went down or stayed the same over time. This would mean that the chipmaker’s top leaders knew about the weakening demand in time, that they were able to cut their production orders, and that they were able to perfectly manage their inventory levels to save money in these tough economic times.

Next, we need to keep track of AMD’s promises to buy. This is the chipmaker’s obligation to buy wafers and semiconductor substrates from its chip fabrication partners, like Taiwan Semiconductor (NYSE:TSM) and GlobalFoundries Inc. (NASDAQ:GFS), as well as technology and other IP licenses. If this number goes down by a lot, it means that the company is expecting PC sales to stay low and is cutting back on production orders now. But that doesn’t mean that’s always the case.

In reality, production orders can’t always be completely canceled, especially if inventory has already started moving through the production lines. So, I expect AMD’s inventory levels to go up at a single-digit rate in Q4 and its purchase commitments to go down from one quarter to the next as the company gradually moves to a leaner operating model for FY23. Now that we’ve said that, let’s talk about AMD’s finances.

Financial Expectations

It’s important to know that AMD reports its sales in four different categories: Data Center, Client, Gaming, and Embedded. Last quarter, a little over 29% of the company’s total sales came from the Gaming segment, which is by far its biggest source of income. This segment includes sales of discrete GPUs, which are used by cryptocurrency miners and gamers, and semi-custom SoC products (used in Xbox and PlayStation consoles).

I think that most gamers won’t buy anything until the 7000-series budget GPUs come out in the first quarter of FY23. In the same way, Sony Group Corporation (NYSE:SONY) and Microsoft Corporation (NASDAQ:MSFT) are expected to release updated versions of their PlayStation and Xbox consoles later this year, which could hurt sales in the gaming segment in Q4. Usually, the segment’s revenue grows by more than 20% from one quarter to the next. However, because of the things I mentioned above, I expect its growth rate to slow to 10% in Q4 and its revenue to reach $1.79 billion.

On the other hand, AMD’s Data Center sales have shown little to no cyclicality. In the last couple of years, the chipmaker has released a few data center accelerators that are already giving Nvidia’s best a run for its money. Since there isn’t anything that would change the status quo, I expect AMD’s data center revenue to keep growing by another 5% sequentially, bringing its Q4 revenue to about $1.69 billion.

The sales from already-established FPGAs, adaptive SoCs, and ACAP products are part of the embedded segment. There aren’t any factors that would make sales of this segment go up significantly in Q4, so I expect AMD’s embedded sales to go up by only 2% and its revenue for the quarter to be $1.32 billion.

In the client segment, microprocessors and APUs for desktop computers and personal notebooks are sold. We’ve already seen that PC shipments dropped a lot during Q4, even though it was the holiday season, so AMD’s client segment is likely to be hit the hardest by this drop in demand. I think AMD’s client revenue will drop by 35% from one quarter to the next, bringing its revenue for the quarter to about $664 million.

This means that we can estimate that the whole company will make $5.47 billion in sales. At the time this was written, the consensus on Wall Street was between $5.42 billion and $5.74 billion, which is close to what I thought.

But even so, you should also pay attention to what AMD’s management says about Q1 FY23 and the rest of the year. In particular, is the management trying to cut back on orders to save money during the recession, or are they keeping production levels the same in hopes of a quick rise in demand and aggressive market share gains over larger competitors? I think this will set the mood of investors for the next year.

Bottom Line

AMD stock is trading at 5.3 times its sales over the last twelve months. This may seem like a lot by itself, but it’s pretty low when compared to other things in the same industry. The chart below shows that many of the chipmaker’s popular peers in the semiconductor industry are trading at even higher Price-to-Sales multiples, even though their revenue growth is much slower. So, I think that AMD is a good buy for investors with a long-term perspective at its current price.

Regarding AMD’s upcoming earnings report, I think the company will fall victim to the industry-wide drop in consumer demand. Its revenue will be around $5.47 billion, and its shares will stay down for now. In the end, this slowdown is likely to hurt investors who only plan to hold on to their money for a short time.

But investors with a time horizon of more than a few years may want to buy AMD shares while they are still relatively cheap. AMD stock is a good buy at its current price because it is growing quickly and is worth a lot. But before placing the buy orders, keep an eye on the chip maker’s inventory levels, purchase commitments, segment revenue, and management’s outlook for the coming year to get a better idea of growth prospects.

Featured Image: Freepik @ nmmobile789

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.