Second quarter results from AMD (NASDAQ:AMD) indicate that I was partially right and partially wrong about AMD stock. The chip maker’s FY2020 Q2 earnings call suggested that I was right about its weaknesses but underestimated its strengths.
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On-Target About AMD’s Weaknesses
In multiple columns about AMD stock this year, I was bearish about shares. My pessimism was largely based on the company’s high leverage to China and its weakness in artificial intelligence or AI.
Since China has been trying to rely more on its own chip makers and less on foreign chip makers, I thought that AMD’s revenue from China would take a big hit. And because of what I saw as AMD’s relative weakness in AI, I contended that the company’s datacenter revenue and profitability would be negatively impacted.
Although, unsurprisingly there was no mention of China or AI on AMD’s Q2 results conference call (the company has said little or nothing about those issues this year), a few statistics indicate that those areas may have negatively affected the company’s results.
Specifically, the revenue that the company obtained from its desktop graphics processing units, or GPUs, fell year-over-year last quarter. GPUs are frequently used to support AI. AMD’s weakness in AI was likely the biggest reason for the YOY decline in GPU revenue.
Increasing the likelihood of that conclusion, the company noted that its revenue from datacenter GPUs had also dropped YOY. The weakness of the company’s GPU sales were likely a key reason that its Computing and Graphics products fell 5% quarter-on-quarter and came in merely in-line with analysts’ average estimate (unit sales did, however, jump 45% YOY.) Finally, the average selling price of AMD’s GPU dropped YOY and quarter-over-quarter.
On AMD’s earnings conference call, AMD’s CEO, Lisa Su said “We expect revenue to increase in the second half of the year, as additional cloud-based visual computing wins ramp and we launch our new CDNA data center GPU architecture optimized for next-generation exascale and machine learning workloads.”
That may indeed occur, but AMD seems to be lagging for now when it comes to the growth of its datacenter business. The revenue of Intel’s (NASDAQ:INTC) cloud business jumped 47% YOY and reached a record level. And the sales of Intel’s overall datacenter group rose slightly last quarter to $7.1 billion from $7 billion in Q1.
Meanwhile, the operating income of AMD’s Computing and Graphics unit fell to $200 million in Q2 from $262 million in Q1.
A decline in demand from China likely also hurt AMD’s Computing and Graphics business. Chinese companies can probably produce their own chips for notebooks and PCs, since those processors aren’t as technologically advanced as top-of-the-line GPUs. Consequently, a reduction of demand for AMD’s products from China likely primarily affected the higher-end products of its Computing and Graphics units, including datacenter GPUs.
Additionally, as I predicted previously, AMD’s relative weakness in AI likely hurt the average selling prices and profitability of its higher-end chips for datacenters.
Underestimating AMD’s Strengths
I underestimated the appeal of AMD’s chips for notebooks and desktop PCs. Due to the superior efficiency of its processors for those type of computers, the company appears to have continued to gain market share at Intel’s expense in those categories.
I had thought that Intel’s price cuts would dull the growth of AMD in those areas, but that was obviously not the case. Further, I also underestimated the extent to which AMD would benefit from the work-from-home trend.
And of course we couldn’t have known that Intel would delay its transition to 7 nm chips, which lit a fire under AMD stock.
The Bottom Line on AMD Stock
AMD’s shares will likely continue to rise as it takes market share from Intel in notebooks and PCs. But AMD’s gains could be limited by further price cuts by Intel in those categories, along with the decline of the work-from-home trend.
Meanwhile, AMD’s relative weakness in GPUs for AI in particular and higher-end data center chips could continue, although the company’s “data center GPU architecture” could possibly turn the trend around. But I still think that the company’s profitability and overall growth could potentially be lower than some anticipate.
As of this writing, the author did not own any of the aforementioned stocks.
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