After two years of a work-from-home-fueled boom, we are now in the midst of a steep downturn in PC and consumer electronics spending. Chip stocks, designers, and suppliers of the components used to make personal computing devices were crushed. Advanced Micro Devices (NASDAQ: AMD) is no exception, as its "client" segment (PCs) sank 40% year over year in the third quarter of 2022.
However, the backbone of future consumer-facing applications is now being built in earnest. Frequently referred to as the metaverse, enterprise data center construction in support of this three-dimensional virtual future is booming right now, and AMD's leading segment is soaring and largely offsetting pain elsewhere.
Backing out of an acquisition, AMD's business lines offset
AMD already pre-released third-quarter 2022 earnings, so its official release showing 29% year-over-year revenue growth was no surprise. However, some more nuanced segment sales provide a clearer picture of what's going on.
Growth was led by the "embedded" and "data center" segments, but embedded was virtually nonexistent last year. Back in February 2022, AMD completed the takeover of field-programmable gate array (FPGA) chip leader Xilinx, which now makes up close to all of the new embedded business line ($1.3 billion in revenue in Q3 2022, compared to just $79 million the same time last year).
Backing Xilinx out of the equation, we see that booming data center sales are the real growth engine these days. Data center revenue skyrocketed 45% year over year to $1.61 billion. That offset the 40% year-over-year decline in the "client" group to $1.02 billion. The gaming segment was up a decent 14% to $1.63 billion, with higher game console sales (Sony's Playstation 5, or a handful of handheld gaming PCs like the Steam Deck, for example) offsetting lower PC GPU (graphics processing unit) sales.
How long will the metaverse float AMD's results?
The explosion in data center revenue comes as no surprise, nor does AMD's outlook for data center sales to once again increase to close out 2022. The company said fourth-quarter revenue should jump 14% year over year, with data center sales notching an increase over record Q3 results. Embedded will once again help, too, as Xilinx still wasn't part of AMD in Q4 2021.
Meta Platforms (NASDAQ: META), formerly known as Facebook, can be thanked in large part for this continued surge. However, while the company's big bets on the metaverse (which involve investing heavily in data centers right now) have become a punching bag for the media and disgruntled investors alike as of late, it's not just Meta on a data center spending spree. All the cloud tech giants (Microsoft, Amazon, and Alphabet's Google) reported big increases in their data center spending last quarter.
At least one of these companies -- Meta -- has given early indications that the surge in data center spending will continue well into 2023. 2022 guidance from Meta CFO David Wehner calls for $32 billion to $33 billion in capital expenditures. Initial guidance for 2023 is for capital expenditures to increase again to a range of $34 billion to $39 billion, driven by "investments in data centers, servers, and network infrastructure."
For AMD, which gobbled up data center market share at the expense of Intel, this is great news. Not only is the data center market poised to keep expanding next year, but Intel itself admitted it will probably keep giving up market share to its competitors for at least a couple of years.
PC demand could remain muted for a few more quarters as the industry corrects an oversupply of consumer electronics in inventory. But while this situation gets corrected, AMD could continue to grind out some growth thanks to the metaverse and other data center and network spending. After the Q3 update, AMD trades for 29 times trailing-12-month free cash flow. If you believe AMD's consumer products will return to growth mode next year, shares of this top chip stock are worth a look right now.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients have positions in Advanced Micro Devices, Alphabet (C shares), Amazon, and Meta Platforms, Inc. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet (A shares), Alphabet (C shares), Amazon, Intel, Meta Platforms, Inc., and Microsoft. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, short January 2023 $57.50 puts on Intel, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.
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