Advanced Micro Devices, Inc. (AMD) is scheduled to report its fourth-quarter results on January 30. Wall Street expects the company’s EPS and revenue for the quarter to improve over the year-ago quarter.

Looking at the recent trends, although AMD enjoys tailwinds arising out of the high demand for AI-focused chips, its other segments continue to face challenges. The fourth-quarter numbers can offer better insights on this front.

In this piece, I have discussed why it could be wise to avoid the stock despite the expected improvement in its financials.

For the fourth quarter, AMD’s EPS and revenue are expected to increase 11.6% and 9.6% year-over-year to $0.77 and $6.14 billion, respectively. The company has a solid earnings history, having beaten the consensus estimates in each of the trailing four quarters.

AMD’s Data Center segment’s revenue in the third quarter was flat year-over-year, coming in at $1.60 billion. Its Client segment revenue was higher by 42.2% year-over-year to come in at $1.45 billion, primarily driven by higher Ryzen mobile processor sales. However, its Gaming segment and Embedded segment revenues were down 7.7% and 4.6% year-over-year to $1.51 billion and $1.24 billion, respectively.

AMD’s Chair and CEO, Dr. Lisa Su, said, “We delivered strong revenue and earnings growth driven by demand for our Ryzen 7000 series PC processors and record server processor sales. Our data center business is on a significant growth trajectory based on the strength of our EPYC CPU portfolio and ramp of Instinct MI300 accelerator shipments to support multiple deployments with hyperscale, enterprise, and AI customers.”

AMD’s EVP, CFO, and Treasurer Jean Hu said, “We executed well in the third quarter, delivering year-over-year growth in revenue, gross margin, and earnings per share.” For the fourth quarter, the company expects its revenue to be approximately $6.10 billion, plus or minus $300 million, representing a year-over-year growth of roughly 5% at the mid-point of the revenue range.

Its non-GAAP gross margin is expected to be approximately 51.5%. Post its third quarter results, Jean Hu said, “In the fourth quarter, we expect to see strong growth in Data Center and continued momentum in Client, partially offset by lower sales in the Gaming segment and additional softening of demand in the embedded markets.”

On October 10, 2023, AMD announced the agreement to acquire Nod.ai to expand its open AI software capabilities. The acquisition of Nod.ai aligns with AMD’s AI growth strategy centered on an open software ecosystem that lowers the barriers of entry for customers through developer tools, libraries and models.

Nod.ai’s software technology accelerates the deployment of AI solutions optimized for AMD Instinct data center accelerators, Radeon GPUs, Ryzen AI processors, and EPYC processors. Furthermore, the company’s AMD Instinct MI300A and MI300X GPUs are on track for volume production in the fourth quarter to support deployments with several leading HPC, cloud and AI customers.

Also, during the fourth quarter, AMD announced the AMD Ryzen Threadripper PRO 7000 WX-Series and reintroduced the Threadripper processor lineup for high-end desktop space, with the Ryzen Threadripper 7000 processors helping deliver high-end performance for desktop users. On October 19, 2023, the company introduced the fastest AMD Radeon GPU ever developed for laptops, called the AMD Radeon RX 7900M.

AMD’s stock has gained 106.3% over the past nine months and 135.8% over the past year to close the last trading session at $177.25.

Here’s what you might want to consider ahead of its upcoming earnings release:

Mixed Fundamentals

AMD’s revenue for the third quarter ended September 30, 2023, rose 4.2% year-over-year to $5.80 billion. Its non-GAAP gross profit increased 6.7% over the prior-year quarter to $2.96 billion. The company’s non-GAAP operating income rose marginally year-over-year to $1.28 billion. Also, its non-GAAP net income increased 3.7% year-over-year to $1.14 billion. In addition, its non-GAAP EPS came in at $0.70, representing an increase of 4.5% year-over-year.

On the other hand, its non-GAAP operating margin declined by one percentage point to come in at 22%. In addition, its net cash provided by operating activities declined 56.4% year-over-year to $421 million.

Mixed Analyst Estimates

Analysts expect AMD’s EPS and revenue for fiscal 2023 to decline 24.2% and 4% year-over-year to $2.65 and $22.66 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 47.6% and 18.5% year-over-year to $3.92 and $26.85 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, AMD’s 66.92x is 325.3% higher than the 15.73x industry average. Likewise, its 12.51x forward EV/Sales is 323.7% higher than the 2.95x industry average. Its 66.78x forward non-GAAP P/E is 168.8% higher than the 24.85x industry average.

Weak Profitability

AMD’s 0.38% trailing-12-month Return on Common Equity is 74.7% lower than the 1.50% industry average. Likewise, its 0.94% trailing-12-month net income margin is 54.7% lower than the 2.07% industry average. Furthermore, the stock’s 0.33x trailing-12-month asset turnover ratio is 47.1% lower than the industry average of 0.62x.

Also, AMD’s trailing-12-month EBIT margin is negative 0.41% compared to the 4.68% industry average. Likewise, its trailing-12-month Return on Total Capital is negative 0.10% compared to the 2.69% 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. It has a D grade for Quality, consistent with its weak profitability.

Also, its 1.70 beta justifies its D grade for Stability.

AMD is ranked #80 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here to access AMD’s Growth, Momentum, and Sentiment ratings.

Bottom Line

AMD is expected to report a year-over-year improvement in revenue and earnings for the fourth quarter. Its Client and Data Center segments are expected to see double-digit year-over-year growth, driven by the recovering PC market and growing demand for AI-focused chips.

However, its Gaming and Embedded segments are expected to continue witnessing a decline in revenues over the prior-year quarter as gaming chip demand remains weak. Also, softness in the embedded markets due to destocking will hurt Embedded segment revenues in the fourth quarter.

Meanwhile, with the rollout of its MI300A and MI300X GPUs, the company is expected to see substantial long-term growth in its Data Center segment revenues. However, competition is rising in this segment.

Despite the anticipated growth in its Data Center segment, the company continues to face challenges in the Gaming and Embedded segments. Moreover, its weak profitability and stretched valuation are concerning. Considering these factors, it could be wise to avoid the stock now.

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:

Photronics, Inc. (PLAB)

ChipMOS TECHNOLOGIES INC. (IMOS)

Renesas Electronics Corporation (RNECF)

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 $2.46 (+1.39%) in premarket trading Monday. Year-to-date, AMD has gained 20.24%, versus a 2.55% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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