Computer processor maker AMD (NASDAQ:AMD) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 10.2% year on year to $6.17 billion. On the other hand, next quarter's revenue guidance of $5.4 billion was less impressive, coming in 6.1% below analysts' estimates. It made a non-GAAP profit of $0.77 per share, improving from its profit of $0.69 per share in the same quarter last year.
AMD (AMD) Q4 FY2023 Highlights:
- Market Capitalization: $287.3 billion
- Revenue: $6.17 billion vs analyst estimates of $6.14 billion (small beat)
- EPS (non-GAAP): $0.77 vs analyst expectations of $0.77 (small miss)
- Revenue Guidance for Q1 2024 is $5.4 billion at the midpoint, below analyst estimates of $5.75 billion
- Free Cash Flow of $242 million, down 18.5% from the previous quarter
- Inventory Days Outstanding: 130, down from 172 in the previous quarter
- Gross Margin (GAAP): 50.7%, in line with the same quarter last year
“We finished 2023 strong, with sequential and year-over-year revenue and earnings growth driven by record quarterly AMD Instinct GPU and EPYC CPU sales and higher AMD Ryzen processor sales,” said AMD Chair and CEO Dr. Lisa Su.
Founded in 1969 by a group of former Fairchild semiconductor executives led by Jerry Sanders, Advanced Micro Devices or AMD (NASDAQ:AMD) is one of the leading designers of computer processors and graphics chips used in PCs and data centers.
AMD began producing computer processors (CPUs) as a second source supplier for Intel as part of Intel’s original processor deal with IBM for the first PCs in the early 1980s.
For the next few decades, AMD would have intermittent success in creating its own chips that could better run Intel's own x86 processor architecture, at times grabbing market share from Intel in the data center with innovative designs like Athlon or Opteron, it was not able to find enduring competitive success.
Faced with bankruptcy after the Great Financial Crisis, AMD spun out its manufacturing arm, Global Foundries, becoming a far less capital intensive designer of semiconductors, allowing for higher profit margins The entrance of Dr. Lisa Su as CEO in 2016 led to a turning point in chip designs, AMD’s Epyc datacenter CPUs and the Ryzen PC CPUs would eventually surpass Intel due to superior higher performance at lower cost.
Where AMD traditionally could only compete with Intel at the low end, in the years since 2016 it has captured share in the most profitable portion of the business — high-end PCs and data center servers, where performance is paramount. Essentially, AMD improved the economics of its business by outsourcing its manufacturing, and competing successfully, but partnerships with chip manufacturers like Taiwan Semiconductor Manufacturing Company will be important for enduring success.AMD’s primary competitors are Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), and Qualcomm (NASDAQ:QCOM).
Processors and Graphics Chips
Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models.
AMD's revenue growth over the last three years has been very strong, averaging 39% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $5.60 billion in the same quarter last year to $6.17 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
AMD had an average quarter as its revenue grew 10.2% year on year, in line with analysts' estimates. We believe the company is still in the early days of an upcycle, as this was just the second consecutive quarter of growth and a typical upcycle tends to last 8-10 quarters.
AMD's management team believes its revenue growth will continue, guiding to 0.9% year-on-year growth next quarter. Analysts expect the company to grow its revenue by 18.2% over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, AMD's DIO came in at 130, which is 28 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. AMD's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 50.7% in Q4, down 0.1 percentage points year on year.
Despite declining over the past year, AMD still retains industry standard gross margins, averaging 50.3%, pointing to its competitive offering, decent cost controls, and possibly modest pricing pressure.
AMD reported an operating margin of 22.9% in Q4, up 0.4 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
AMD's operating margins have been trending down over the last year, averaging 21.3%. This is a bad sign for AMD, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering AMD expect earnings per share to grow 44.6% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. AMD's free cash flow came in at $242 million in Q4, down 45.4% year on year.
As you can see above, AMD produced free cash flow of just $1.12 billion in the last year, resulting in a measly 5% free cash flow margin.
Return on Invested Capital (ROIC)
EPS growth informs us whether a company's revenue growth was profitable. But was it capital-efficient? For example, if two companies had the same EPS growth, we’d prefer the one putting up those numbers with lower capital requirements (usually in the form of balance sheet debt and equity).
Understanding a company’s long-term ROIC (return on invested capital) gives another level of insight because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also its management team's decision-making prowess (because they're the individuals dictating what the company invests in).
AMD's five-year average ROIC was 47.9%, placing it among the best semiconductor companies. Just as you’d like your investment dollars to generate returns, AMD's invested capital has produced excellent profits. The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, AMD's ROIC has averaged 58.4 percentage point decreases each year. We still think AMD is a good business, but if its returns keep falling, it could suggest its competitive advantage or profitable investment opportunities are shrinking. We'll keep a close eye on the company.
Key Takeaways from AMD's Q4 Results
We were impressed by AMD's strong improvement in inventory levels. That stood out as a positive in these results. However, its revenue guidance for next quarter missed analysts' expectations. Overall, the results could have been better. The company is down 1.4% on the results and currently trades at $169.54 per share.
Is Now The Time?
When considering an investment in AMD, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
There are several reasons why we think AMD is a great business. While we'd expect growth rates to moderate from here, its superb revenue growth over the last three years implies it's winning market share. And its stellar ROIC suggests it has been a well-run company historically.
AMD's price-to-earnings ratio based on the next 12 months is 44.3x. Looking at the semiconductors landscape today, AMD's qualities stand out, and we like the stock at this price.
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