Advanced Micro Devices, Inc. (AMD), a leading semiconductor company, is set to report its quarterly financial results on Tuesday, October 31, 2023, after the market opens. Analysts expect the company’s revenue and EPS for the third quarter (ended September 2023) to increase 2.3% and 0.9% year-over-year to $5.69 billion and $0.68, respectively.

For the to-be-reported quarter, AMD expects revenue to be nearly $5.7 billion, plus or minus $300 million, and forecasts non-GAAP gross margin to be approximately 51%.

Although the chipmaker surpassed analysts’ estimates for revenue and earnings in the second quarter, it reported year-over-year declines. AMD posted second-quarter revenue of $5.36 billion, topping analysts’ estimate of $5.32 billion. However, it fell from $6.55 billion in the prior year’s quarter, marking a second consecutive quarter of declines.

The company’s Data Center segment revenue during the second quarter was down 11% year-over-year, primarily due to lower 3rd Gen EPYC processor sales. Moreover, its processor business has slowed significantly in recent quarters, reflecting a slump in the global PC market. AMD’s Client segment revenue dropped 54% year-over-year, while its Embedded segment revenue fell 17%.

AMD reported adjusted EPS in the second quarter of $0.58, compared to the consensus estimate of $0.57, but fell 44.8% year-over-year.

However, AMD is one of the few companies making high-end graphics processing units (GPUs) for artificial intelligence (AI). AMD’s CEO Lisa Su said on a call with analysts that the company is boosting its AI-related research and development (R&D) spending and has developed a strategy that includes AI-specific chips and software development.

The chipmaker said its forthcoming most advanced GPU for AI, the MI300X, will begin shipping to some customers later this year. The MI300X features a multi-chip let design that combines AMD’s Zen 4 and CDNA 4 microarchitecture. It will be offered in an OAM-based (OCP Accelerator Module) package and is expected to draw up to 750W of power.

Also, recently, the company signed a definitive agreement to acquire Nod.ai to expand its Open AI software capabilities.

While AMD’s consistent efforts to expand its generative AI portfolio would drive long-term profitability and strengthen its competitive position, the company’s growth in the near term could be hampered due to prevailing macroeconomic headwinds.

Global semiconductor revenue is expected to decline 11.2% year-over-year to a total of  $532 billion in 2023, according to the forecast from Gartner, Inc.

“As economic headwinds persist, weak end-market electronics demand is spreading from consumers to businesses, creating an uncertain investment environment. In addition, an oversupply of chips which is elevating inventories and reducing chip prices, is accelerating the decline of the semiconductor market this year,” said Richard Gordon, Practice Vice President at Gartner.

Shares of AMD have gained 10.3% over the past six months to close the last trading session at $96.43. However, the stock has plunged 1.7% over the past month and 13.2% over the past three months.

Here’s what could influence AMD’s performance in the upcoming months:

Deteriorating Financials  

AMD’s revenue declined 18.2% year-over-year to $5.36 billion for the second quarter ended June 30, 2023. Its non-GAAP gross profit decreased 24.7% from the year-ago value to $2.67 billion. The company’s non-GAAP operating income was $1.07 billion, down 46.1% from the previous year’s quarter.

Furthermore, the company’s non-GAAP net income was $948 million, a decline of 44.5% year-over-year and its non-GAAP earnings per share fell 44.8% year-over-year to $0.58.

Mixed Analyst Estimates

Analysts expect AMD’s revenue to decrease 3.4% year-over-year to $22.80 billion for the fiscal year ending December 2023. The consensus earnings per share estimate of $2.75 for the ongoing year indicates a 21.6% year-over-year decline. However, the company has surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

For fiscal year 2024, the company’s revenue and EPS are expected to grow 19.8% and 50.8% year-over-year to $27.32 billion and $4.14, respectively.

Low Profitability

GS’ trailing-12-month EBIT margin of negative 1.73% compared to the industry average of 4.66%. Likewise, its trailing-13-month net income margin of negative 0.11% is unfavorably compared to the industry average of 2.03%. The stock’s trailing-12-month asset turnover of 0.32x is 47.6% lower than the 0.62x industry average.

In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 0.05%, negative 0.41%, and negative 0.04% are lower than the industry averages of 1.13%, 2.47%, and 0.03%, respectively.

Elevated Valuation

In terms of forward non-GAAP P/E, AMD is currently trading at 35.06x, 74.3% higher than the industry average of 20.11x. Moreover, the stock’s forward EV/Sales and EV/EBITDA of 6.68x and 39.19x are 179.9% and 204.8% higher than the industry average of 2.39x and 12.86x, respectively.

Further, the stock’s forward Price/Sales and Price/Cash Flow multiples of 6.83 and 36.95 are higher than the respective industry averages of 2.34 and 18.95.

POWR Ratings Reflect Uncertainty

AMD’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, equating to Sell in our proprietary rating 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. The stock has a D grade for Quality and Value, consistent with its lower-than-industry profitability and lower valuation relative to its peers, respectively.

In addition, AMD has a D grade for Stability, justified by its 24-month beta of 1.72.

Within the Semiconductor & Wireless Chip industry, AMD is ranked #83 out of 91 stocks.

Beyond what I have stated above, we have also given AMD grades for Sentiment, Growth, and Momentum. Get all AMD’s POWR Ratings here.

Bottom Line  

Despite slightly topping analyst estimates for revenue and earnings, AMD reported a revenue decline of nearly 18% in its fiscal 2023 second-quarter earnings report, primarily due to a deep slump in the global PC market. Further, analysts seem bearish about the chipmaker’s near-term prospects due to prevailing macroeconomic challenges.

Given AMD’s poor financials, lower-than-industry profitability, stretched valuation, and bleak near-term outlook, it could be wise to avoid this chip stock now.

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

Given its uncertain near-term prospects, the odds of AMD outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these two A-rated (Strong Buy) or B-rated (Buy) stocks from the Semiconductor & Wireless Chip industry instead:

ChipMOS Technologies Inc. (IMOS)

Everspin Technologies Inc. (MRAM)

STMicroelectronics N.V. (STM)

To explore more A and B-rated chip stocks, click 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 fell $0.01 (-0.01%) in premarket trading Monday. Year-to-date, AMD has gained 48.87%, versus a 9.25% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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