Advanced micro-systems (AMD -0.67%) announced its third quarter results after the market closed on Tuesday, delivering performance in terms of turnover and result below expectations. The semiconductor company also issued a forecast below the average analyst target, but there were some bright spots in some key business segments – and the stock rose in after-hours trading.
As AMD faces relatively weak demand for PC central processing units (CPUs), the market appears to be bullish on Q4 sequential sales growth forecasts for data centers and business segments embedded in the company. Is the stock a buy on the heels of the recently released third quarter earnings and outlook?
Weak demand for PC processors led to underperformance in the third quarter
AMD released preliminary third quarter results on October 6, and actual third quarter results are roughly in line with those estimates. Revenue grew approximately 29% year-over-year to $5.565 billion, slightly below the $5.6 billion in sales targeted in the preliminary report and well below initial guidance growth of around 55% year-on-year. The semiconductor specialist’s revenue also fell short of Wall Street analysts’ average estimate for revenue of $5.65 billion, and non-GAAP (adjusted) profit of 0.67. dollar per share during the period is below the average analyst’s call for earnings per share of $0.69. .
Sales for the quarter fell short of the company’s original guidance due to weaker than expected performance in the customer segment, which consists of PC CPU products. In addition to weaker-than-expected unit sales, AMD experienced a lower-than-expected average processor selling price in the quarter and $160 million of unfavorable inventory, price and associated reserve charges in the graphics business. and clients.
Revenue from the company’s customer segment fell 40% year-over-year to $1 billion amid slowing demand and weak pricing. On the other hand, revenue from the company’s Data Center, Gaming and Embedded segments saw strong year-over-year growth and was roughly in line with management’s guidance issued at the time of the release. second quarter results in July. While the company’s overall performance in the third quarter was a bit weaker than expected, performance outside of the customer segment looked encouraging.
Bright spots in other segments
AMD’s processors have been gaining market share since Intel in the PC and server markets. While demand in the PC category has weakened lately, customers have continued to spend heavily on data center processors and chips. In the third quarter, data center segment revenue jumped 45% year-over-year to approximately $1.6 billion, and segment operating profit increased 64% to $505 million.
Revenue from AMD’s embedded segment reached $1.3 billion in the quarter, compared to about $100 million in sales in the year-ago quarter. The big leap was achieved by integrating Xilinx, a designer of field-programmable gate arrays (FPGAs) and other programmable chips that AMD acquired earlier this year in a 49-year deal. billions of dollars. Xilinx is arguably the world’s leading creator of FPGA chips, which can be programmed for different applications and have become important components for data centers, artificial intelligence and 5G communication networks.
Meanwhile, revenue from the company’s gaming segment rose 14% year-over-year to $1.6 billion. Game console chip sales made significant gains over the prior year period, but sales of graphics processing units (GPUs) declined, likely due to reduced mining demand resulting of the cryptocurrency bear market.
Basically, management expects revenue from the data center and embedded segments to grow sequentially in the fourth quarter. Both units have a relatively high margin and have already posted strong performance in the third quarter. Expectations for continued sales growth in the current quarter are encouraging, but AMD’s sales growth outlook still looks considerably weaker than it did in July.
Prior to the recent release of third quarter results, analysts’ average estimate had guided fourth quarter revenue of $5.95 billion, but AMD now expects sales to be in the 5, $2 billion and $5.8 billion for the period. The company’s annual forecast now calls for sales between $20.5 billion and $26.5 billion, representing annual growth of approximately 43%. The previous median target called for sales of $26.3 billion.
Is AMD stock a buy?
AMD’s stock has fallen 60% in 2022 so far and is down about 63% from the peak it hit last November. At the same time, the stock has also gained around 71% over the past three years, and there are still significant risk factors on the horizon.
Given the weakness in the PC processor market, AMD’s performance could be uneven in the near term. While the demand outlook for the company’s data centers and integrated segments is promising, continued macroeconomic headwinds may result in an overall decline in business performance or otherwise spur continued stock sell-offs. .
For investors looking for exposure to the semiconductor space, AMD shares appear to be priced non-prohibitively, trading at around 16.5 times this year’s expected earnings, and I believe the stock is a worth buying at current prices. On the other hand, the company’s outlook doesn’t appear to have improved much with its recent quarterly release, and it’s possible that Wall Street’s bullish reaction was largely the result of expectations for worse results.
Keith Noonan has no position in the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: January 2023 Long Calls at $57.50 on Intel, January 2025 Long Calls at $45 on Intel, January 2023 Short Calls at $57.50 on Intel, and January 2023 Short Calls at $57.50 on Intel and January 2025 sale at $45 on Intel. The Motley Fool has a disclosure policy.