AMD Earnings: Embedded Chip Weakness Leads to a Soft Forecast, but AI Roadmap Is on Track

Narrow-moat Advanced Micro Devices AMD reported solid third-quarter results but provided investors with a fourth-quarter outlook that fell short of our expectations, due to struggles within its embedded business. More importantly, AMD provided insight into its artificial intelligence accelerator growth trajectory, expecting $400 million of revenue in the fourth quarter and over $2 billion in 2024. These forecasts were below our prior estimates, but we don’t consider them to be a huge disappointment either, and it’s quite possible that such estimates could be conservative. We still think AMD will emerge as the number two player in merchant AI semis, behind only Nvidia. We trim our fair value slightly to $125 from $130, based on lower long-term gaming and embedded growth assumptions, but shares still appear cheap.

Revenue in the September quarter was $5.8 billion, up 8% sequentially, up 4% year over year, and above the midpoint of guidance of $5.7 billion. Data center revenue was the bright spot, up 21% sequentially to $1.6 billion with a nice recovery in server processor sales for traditional workloads. PC processor revenue recovered well, up over 40% both sequentially and year over year to $1.45 billion, as PC chip demand is coming off a cyclical bottom. Embedded revenue faced weakness, however, with muted demand from telecom customers and other broad-based industries, as revenue fell 15% sequentially to $1.2 billion, worse than guidance. Higher sales levels enabled the adjusted gross margin to rise 140 basis points sequentially to 51.1%, just ahead of guidance.

For the December quarter, AMD expects revenue in the range of $5.8 billion-$6.4 billion, which, at the midpoint, represents growth of 5% sequentially and 9% year over year, but is below our prior expectations. Data center should deliver strong growth in both AI accelerators and server processors, but embedded weakness should continue, while gaming revenue should also be soft.