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AMD's 2023 Outlook: What to Expect

The Motley Fool logo The Motley Fool 3/25/2023 Anders Bylund
AMD's 2023 Outlook: What to Expect © Provided by The Motley Fool AMD's 2023 Outlook: What to Expect

Let's chill out where Wall Street runs through Silicon Valley for a bit. Advanced Micro Devices (NASDAQ: AMD) is a leading semiconductor designer, specializing in PC-compatible x86 processors and graphics processing units (GPUs). The company's processors and graphics cards are used in high-performance computing, gaming, and more, to be manufactured by third-party chip-making specialists. The company is making waves in the stock market recently, posting muscular results, with a few bruises, in the middle of a global inflation crisis.

Today, I'll take a look under the hood of AMD's financial outlook. This review should help you set reasonable expectations for AMD, informing your investment decisions.

AMD's financial performance in the short term

Let me peel back the curtain on AMD's financial performance in the short term. Sometimes, there's just nothing like cold, hard financial data to lay the foundation for a deeper dive.

AMD's most recent earnings report, covering the fourth quarter of 2022, shows a 16% revenue jump from the year-ago report. The top-line total landed at $5.6 billion, which is quite the tasty profit pie.

Unfortunately, net income for the quarter stopped at $21 million, which is a country mile behind the $974 million seen in the previous year. The lower net income resulted primarily from the amortization of intangible assets. A tax benefit of $154 million helped AMD stay above the breakeven line but was not enough to balance out the beefy amortization post. This was a side effect of AMD's $50 billion buyout of embedded chip maker Xilinx. Hold that thought: We'll get back to Xilinx in a minute.

Turning to the performance of AMD's operating segments shows some uneven growth trends.

The data center division was a standout performer in the fourth quarter, with sales of $1.7 billion, up 42% year over year. The chief driver behind these robust sales was the massive demand for AMD's EPYC server processors. The Embedded segment also had a good quarter, with revenue of $1.4 billion. That's a staggering 1,868% year-over-year increase thanks to the inclusion of Xilinx embedded revenue. The Xilinx deal essentially gave AMD access to a whole new addressable market, so it's no surprise that the year-over-year sales boost was stratospheric.

But it's not all wine and roses. The Client and Gaming segments reported lower sales instead. The Client division saw revenue of $903 million, down 51% year over year because of reduced processor shipments resulting from a weak PC market and a significant inventory correction across the PC supply chain. That market is tough right now, following overheated growth in the lockdown phase of the COVID-19 pandemic.

Gaming sales landed at $1.6 billion, down 7% year over year because of lower demand for gaming-specific graphics cards. Higher semi-custom product revenues didn't do much to slow down the division's overall plunge.

Modest guidance targets

And then we have the company's guidance targets. AMD's management expects first-quarter sales of approximately $5.3 billion, roughly 10% below the same period of 2022. The Client and Gaming segments are also expected to decline, but the Embedded and Data Center divisions should grow.

AMD expects non-GAAP gross margin to be approximately 50% in the first quarter of 2023. Despite the mixed levels of product demand, AMD Chair and CEO Lisa Su is confident in the company's ability to gain market share in 2023 and deliver long-term growth based on their differentiated product portfolio.

The company didn't issue any full-year targets, pointing to the obvious culprit. The global economy is simply too unstable and unpredictable these days. Whatever ultra-precise goals you set today might look unreachable or way too easy next week -- and never mind trying to predict the market's condition from three quarters away.

So a single quarter's worth of visibility is what we get, and I won't complain. It's pretty brave to go that far, even.

AMD's expected growth areas

Lisa Su's company is soaring in the data center market, where high-performance computing is the name of the game. With artificial intelligence tools trending like hotcakes, the company is cooking up plenty of chip designs aimed at this rapidly growing market.

But wait; there's more! As companies lean more on data centers to power their IT operations, they need processors and graphics cards that can take on complex workloads. AMD's Ryzen processors, Radeon GPUs, and the Epyc line of server processors fit the bill perfectly.

AMD's research and development focus is all about future-proof technology, currently aimed squarely at artificial intelligence and machine learning. This focus on cutting-edge innovation puts AMD in a strong position to stave off the competition.

The company's strategic acquisitions have also helped to beef up the product portfolio and strengthen its position in the tech industry. Thanks to the $50 billion Xilinx deal, AMD can now offer a broader range of products to customers, expanding its total addressable market and boosting its competitive position in the semiconductor industry. Xilinx and its reprogrammable chip technology will give AMD a bigger slice of the pie, especially in the embedded and industrial sectors.

Isn't AMD too expensive, though?

Despite the usual collection of short-term challenges, AMD's focus on high-performance computing, innovation, and strategic acquisitions should provide a strong foundation for long-term success. The company's moneymaking chips are quite delectable, especially in hot growth areas like artificial intelligence and video gaming. While the stock might not come cheap, trading at 113 times trailing earnings and 51 times free cash flow, those premium price tags are attached to an ambitious growth stock with a pocket full of impressive growth reports.

So AMD may not be every investor's cup of tea, but the stock is a no-brainer buy for those chasing financial growth above all else.


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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.


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