AMD's first-quarter report and guidance are not bad, but the sales outlook for AI chips does not meet the market's high expectations, leading to a 9% drop after hours | Financial Report Insights

On Tuesday, April 30th, after the US stock market closed, semiconductor giant AMD, which is catching up with NVIDIA in the AI chip field and continuously gaining ground from Intel in the CPU field, released its first-quarter financial report for 2024.

Although the company's first-quarter results exceeded expectations, with data center revenue including AI chip sales and client revenue closely linked to the improving PC market both soaring by 80% year-on-year, its revenue guidance for the second quarter met expectations but lacked excitement. The expected annual sales volume for AI accelerator chips was only raised to $4 billion, far behind its competitor NVIDIA. After-hours trading saw the stock price drop by 9%.

On Tuesday, AMD fell by over 1%, ending a four-day winning streak and moving away from a two-week high. Year-to-date, it has risen by 7.4%, slightly outperforming the Nasdaq's cumulative increase of over 4%, but lagging behind the Philadelphia Semiconductor Index's nearly 12% increase.

Driven by the growth prospects of artificial intelligence, AMD has surged by over 76% in the past year, while its competitor NVIDIA has soared by nearly 200%. Due to market concerns about the annual sales of the MI300 AI chip, AMD has fallen by 25% from its peak of $211.38 in early March.

Among the 32 analysts covering the stock recently, 25 have rated it as "buy," 7 as "hold," and none have recommended "sell," indicating that Wall Street remains optimistic, with an average target price of $204.15 implying nearly 29% upside potential.

AMD's First Quarter Revenue Up 2% Year-on-Year, Gross Margin Further Expanded, AI Chip Annual Sales Forecast Raised

Benefiting from the growth in artificial intelligence and personal computer (PC) sales, AMD's revenue and profit have both expanded year-on-year.

The financial report shows that AMD's first-quarter revenue increased by 2% from $5.35 billion in the same period last year to $5.47 billion, slightly higher than the market's expected $54.5 billion but lower than the previous quarter's $6.17 billion.

Adjusted EPS was $0.62, higher than the market's expected $0.61 and last year's first quarter $0.60. Under GAAP, first-quarter net profit was $123 million or $0.07 per share, compared to a net loss of $139 million or $0.09 per share in the same period last year.

However, some netizens are not satisfied with the contribution of AI chip sales to AMD's net profit

In the first quarter, the company's GAAP gross margin increased by 3 percentage points year-on-year to 47%, while the non-GAAP gross margin increased by 2 percentage points to 52%. Non-GAAP operating profit was $1.1 billion, with a net profit of $1 billion, demonstrating continued strengthening in profitability.

In terms of performance guidance, AMD expects second-quarter revenue to be around $5.7 billion, with a fluctuation range of $300 million. The midpoint of the range represents a year-on-year growth of approximately 6% and a quarter-on-quarter increase of about 4%, in line with market expectations of $5.72 billion. The non-GAAP gross margin is expected to further increase to 53%.

The company's CFO stated that they will continue to drive revenue growth and margin improvement, while investing in the significant opportunities in artificial intelligence.

However, some analysts pointed out that merely releasing slightly better-than-expected financial reports and meeting revenue guidance expectations is not enough for investors who are expecting AI to quickly boost performance. This has led to a continuous expansion of AMD's post-market stock price decline.

Lisa Su, Chairman and CEO of AMD, raised the annual sales forecast for the MI300 AI accelerator chip from an initial $3.5 billion to $4 billion, while the market previously considered $6 billion to be a conservative estimate. Disappointment may have also contributed to the accelerated decline in the post-market stock price. In comparison, NVIDIA's first-quarter data center sales reached $18.4 billion.

Su mentioned that in the first quarter, AMD gained market share in server CPU chips, "as the artificial intelligence server market flourishes, AMD sees signs of improved demand for its CPUs."

The first quarter of this year was also the first full sales quarter after the launch of the MI300 AI accelerator, with "tight supply and high demand" for the product. This AI chip has been adopted by over 100 companies and AI customers, including Microsoft, Meta, and Oracle, with sales exceeding $1 billion since its launch in the fourth quarter of 2023:

"For the entire industry, this is an incredible and exciting moment, as the widespread deployment of artificial intelligence is driving broader market demand for more computing. We have performed very well in expanding our data center business and enabling AI capabilities in our product portfolio."

Data center and PC client revenue both surged by 80% year-on-year, with data center revenue reaching a new high and accelerating growth

Su Zifeng commented: "The first quarter performance was strong, with the growth in shipments of MI300 AI accelerators and the adoption of Ryzen and EPYC processors driving the company's data center and client businesses to achieve year-on-year growth of over 80%."

By business segment, the Data Center Division, which includes the new AI chip, saw first-quarter revenue surge by 80% to $2.3 billion from $1.3 billion in the same period last year, setting a historical record for the division. This exceeded market expectations of $2.27 billion and significantly outperformed the revenue growth of 38% year-on-year in the fourth quarter of last year, attributed to the remarkable performance of the AI MI300 chip launched at the end of last year.

Analysts have noted that the growth in AMD's data center revenue in the fourth quarter of last year and the first quarter of this year was "quite considerable."

The company stated that driven by the growth of AMD Instinct™ GPUs and the fourth-generation EPYC™ CPUs, data center revenue not only reached a new high and surged year-on-year, but also increased by 2% quarter-on-quarter, outperforming market expectations of flat quarter-on-quarter growth, mainly driven by the sales of AMD Instinct GPUs. However, part of the revenue in this division was offset by the seasonal decline in server CPU sales.

Including the Client Division, which includes PC sales, first-quarter revenue grew by 85% year-on-year to $1.4 billion, higher than the expected $1.29 billion, mainly due to the sales of the Ryzen 8000 series CPUs, but revenue decreased by 6% quarter-on-quarter.

The Client Division's revenue in the fourth quarter of last year had grown by 62% year-on-year to $1.5 billion. The PC market began to recover in the first quarter of this year, with global PC shipments increasing by 1.5% for the quarter, marking the first growth after two years of decline, according to IDC statistics.

However, AMD's Gaming Division saw a sharp year-on-year decline of 48% and a quarter-on-quarter decline of 33% to $922 million, significantly lower than the expected $964 million, mainly due to a decrease in semi-custom revenue and AMD Radeon™ GPU sales. Customers continued to manage inventory levels, leading to a 46% year-on-year decline and a 20% quarter-on-quarter decline in revenue for the Embedded Division to $846 million, falling short of the expected $941 million

Why is it important and what to pay attention to?

RBC analyst Jordan Klein stated that AMD has the "greatest opportunity" to reshape the chip industry investment sentiment through its financial reports. Previously, its stock price was in an "absolute free fall" from its peak in March, and the financial report may drive a rebound in other chip stocks.

The two key indicators that investors are most concerned about are: the sales guidance of AI chips such as the MI300 accelerator and the performance of the PC market. AMD and Intel have also introduced AI computers that can run generative AI applications locally rather than over the network.

In addition to AI-based capital expenditures, Wall Street also hopes that AMD can provide a strategic outlook for entering the data center AI market. Earlier this year, AMD raised its revenue expectations for the MI300 chip in 2024 from $2 billion to slightly over $3.5 billion, but below the market's general expectation of $6 billion. AMD has stated that the MI300 chip directly competes with Nvidia's best-selling H100 series accelerator.

How does Wall Street view it?

Some analysts believe that AMD is attempting to disrupt Nvidia's dominant position in the data center AI market with the MI300 GPU chip. However, after Nvidia launched the next-generation Blackwell platform and priced it lower than market expectations, AMD's strategy faces significant obstacles.

Nevertheless, with the strong moat of the Zen 4 architecture and the MI300 chip, Wall Street is confident in AMD. UBS believes that sales of MI300 this year are a conservative estimate in the range of $5 billion to $6 billion. Susquehanna also believes that sales will exceed $5 billion this year, stating, "We believe AMD has accumulated enough MI300 bookings and backlogged orders to support its revenue guidance increase."

Bank of America stated, "We remain positive on suppliers serving the cloud infrastructure market," and mentioned that AMD, along with Nvidia, Broadcom, Marvell Technology, and Micron Technology, will become the "big five beneficiaries of artificial intelligence":

"AMD's recovery story in the second half of this year remains intact, with growth in data centers for AI and non-AI servers acting as catalysts. After a long period of inventory digestion, the embedded business will also rise from the lows of the first half of this year. There will be a broad cyclical recovery in non-artificial intelligence areas, and server CPU inventory will return to normal levels after a 33% drop in shipments last year."

Bernstein believes that AMD's significantly weaker sales of MI300 this year compared to the market's expectations at the beginning of the year may have been caused by customer orders being delayed due to high-bandwidth memory supply issues. However, this does not reflect a lack of final demand, nor is it a structural issue, as the ability of the MI300 as a strong alternative to Nvidia has not changed: Last year, much of the discussion at the end of the year focused on AMD's potential in the artificial intelligence hardware market, second only to NVIDIA. The market opportunity seems vast, but AMD must act quickly to capitalize on this favorable trend, as NVIDIA is not standing still. While the MI300 can barely compete with the H100, NVIDIA is introducing the H200 and will also launch the Blackwell chip in the second half of the year