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Semiconductor stocks have been on a roll in 2023 so far, as evidenced by the market-beating 58% gain in the VanEck Semiconductor ETF (SMH). However, individual chip stock returns this year have varied widely.
For example, shares of well-established chipmakers like Intel (INTC), Taiwan Semiconductor (TSM), and Micron Technology (MU) have advanced by 35% - 42% since the start of the year, but are still lagging both SMH and the broader Nasdaq QQQ Invesco ETF (QQQ), which is up 44%. On the other hand, the artificial intelligence (AI)-driven breakout in Nvidia (NVDA) stock (up 219% YTD) propelled the company across the coveted $1 trillion market cap milestone - the first semiconductor stock to achieve this feat.
Shares of Advanced Micro Devices (AMD), is another semiconductor standout. The stock is up 74% in 2023 so far, comfortably outpacing QQQ, SMH, and a number of its chip stock peers.
So, what's behind the remarkable outperformance in AMD this year? And is the upside set to continue from here, or should investors book profits in the stock after its massive rise?
Muted Q2 Guidance
Advanced Micro Devices, the Santa-Clara, CA-based semiconductor company's first-quarter results surpassed analysts' expectations, despite year-over-year declines. Revenues dipped 9% to $5.3 billion, while EPS dropped 47% to $0.60. Shares of AMD fell by more than 9% the next trading day, as a softer-than-expected sales forecast for the second quarter offset the earnings and revenue beat.
A continued demand slowdown in the PC market contributed to declining revenues for AMD. Net revenues from its Client business, which includes sales of PC chips, plummeted by 65.2% from the previous year to $739 million.
Meanwhile, a global slowdown in demand for gaming has also hurt the company's critical Gaming segment. Revenues from this division fell by 6.3% from the previous year to $1.76 billion.
Elsewhere, data center revenues remained stable at $1.3 billion compared to the year-ago period. That flat growth is a concern given AMD's $49 billion acquisition of Xilinx, which was completed in February 2022. The acquisition was aimed specifically at increasing revenues from AMD's data center business, yet revenues from the division have failed to show significant growth over the past few quarters.
At the same time, AMD is facing a slowdown in cash flow and rising debt. AMD's net cash provided by operating activities decreased by 51.1% yearly to $486 million. Further, total debt increased by 38% in the same period to $2.47 billion.
A high-interest rate environment, coupled with declining cash flows from operations and a rising debt load, is a challenging combination for AMD right now.
Strategic Moves Can Act as Tailwinds
AMD's move to outsource all of its production to Taiwan Semiconductor has been a game changer for the company. Not only has it allowed AMD to double its market share in the PC CPU market in seven years - from 17.5% in 2016 to 34.7% in 2023 - but it has also enabled AMD to double down on its efforts in chip designing. Furthering the scope of the partnership, AMD announced in April 2023 that it would be using TSM's 3nm process for its next generation of processors. This will allow AMD to build more efficient and powerful processors, which could lead to an even bigger market share in the CPU business.
In a move to further strengthen its presence in the chip design space, AMD recently announced that it will invest about $400 million over the next 5 years in India to develop its largest R&D centre in Bengaluru.
Meanwhile, AMD is looking to take on Nvidia in the rapidly expanding AI market. A May report in Bloomberg suggested longtime Nvidia client Microsoft (MSFT) was teaming with AMD to collaborate on AI chips. While Microsoft ultimately denied AMD's involvement in its Athena project, specifically, speculation remains that the two companies are partnered on other AI endeavors.
Such prudent strategic moves on the part of AMD can act as tailwinds for the company's stock, provided the execution remains strong.
Valuation Expensive Compared to Peers
In light of its big year-to-date rally, AMD looks a little expensive compared to many of its peers right now.
AMD has a forward price/earnings ratio (p/e) of 52.44 currently. This is below the forward p/e for Nvidia (71.33), but well above the reading of 20.50 for TSM.
Turning to the price/sales ratio, AMD's current p/s ratio of 7.51 is considerably lower than Nvidia's (43.52), but higher than both Intel (2.27) and TSM (6.79).
Meanwhile, AMD currently trades at a price/cash flow ratio of 19.90. Again, that's lower than Nvidia (164.80), but higher than Intel (6.84) and TSM (10.77).
Analysts Bullish on AMD
Overall, analysts are bullish about the prospects for AMD. Out of 28 analysts covering the stock, 20 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 7 have a “Hold” rating, while the mean target price of $135.61 indicates upside potential of about 22% from current levels.
For the second quarter, AMD is expected to report earnings results next Tuesday, Aug. 1. Analysts are expecting EPS to fall 56% year-over-year to $0.40. However, earnings are expected to rise by 5.6% in the third quarter, and by an impressive 57.7% in fiscal year 2024.
Final Takeaway
Arguably, AMD appears to be slightly overextended at current levels. Given declining revenues and EPS in Q1, a global slowdown in demand for PCs, lighter cash flow from operations, rising debt, and a relatively expensive valuation compared to its peers, AMD might not be the best value play in the semiconductor space right now.
However, the company's strategic moves to take on its competition, along with its continually expanding market share in the PC CPU business, bodes well for the company. Moreover, potential high-profile partnerships in the burgeoning AI space could provide significant growth opportunities in the near future.
I remain of the opinion that investors should build their positions in AMD cautiously, strategically buy any dips, and be patient with their holdings as the company's diversified offerings and established credentials across CPUs, AI, and gaming spaces provide revenue visibility and runway for sustained growth.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
