It was disappointing that the outlook fell below market expectations.
On the other hand, even with the lower outlook and associated growth projection, AMD valuation is low compared to all-time-high — even compared to the 2021-11-30 intraday high ($164.46), which was well before the completion of the Xilinx acquisition. It's as if the valuation is actually negatively affected by the latter, with the still high amortisation numbers from the acquisition weighing on the GAAP numbers. If that is the case, then we should see better valuation going forward, as the Xilinx-related amortisation eases. It was down to $585M this quarter.
Client Segment: It was nice to see the operating margin recovering a little in the Client segment, but 15% is still dismal. It's as if they are going to all that trouble competing in that segment for fun only. Intel is still desperate to fill their fabs, I presume, so competition is really tough. The silver lining is that it keeps ARM at bay. But, at the end of the day, AMD is a high-performance computing player, so I don't think they should play in commodity markets for no profit — unless playing has some clear secondary benefits.
Gaming Segment: Similarly, the Gaming segment annoys me. I cannot understand why they accept these long console cycles from Microsoft and Sony. I would hope they could innovate in the high end and push the boundaries more. Hopefully, sales pick up with the Playstation refresh, but I think AMD needs to get into the driver seat in the gaming segment. In the PC space, Nvidia has shown that there is a premium segment in gaming. AMD needs to bring the premium segment into consoles as well. Have multiple models; entry, mainstream and premium. Push the boundaries at least every second year. The console game developers, who once insisted on a stable platform for 10 years, have presumably now all adopted the PC-like development approach and library abstractions. I would think they could deal with low to premium tier hardware models. If AMD doesn't innovate here, they risk losing the console segment to mediocrity. Again, they are supposed to be a player in high-performance computing. Other players can probably do cheap and cool better.
By the way, most of the operating expenses in the Gaming segment are related to the discrete gaming GPU developments and marketing, I presume. Operating expenses for the console contracts should be very low. The return on the discrete gaming GPU efforts is disappointing. I suspect this is a segment where Lisa Su has little input and little enthusiasm. And she is yet to find someone with the interest, talent and drive to make something happen here. Radeon looks pretty good to me, so I don't fault the engineers, but it doesn't sell for some reason.
Embedded Segment: On the other hand, I still love the operating margin in the Embedded space. Hopefully, revenue will return with the promised strong pipeline of product wins. This business is also wonderfully sticky, with AMD Xilinx having products that no one can match, deployed by customers for decades.
Data Centre Segment: The Data Centre segment is back to the 29% operating margin a year ago, and with the ramp of high margin GPUs, I would expect this to soon surpass the record margin in 2022-Q1.
Here is my updated spreadsheet:
And here is the overview since 2021-Q2:
(My spreadsheet is available at OneDrive.)
I particularly like the nice upswing in operating income, which should continue to grow nicely as GPU sales ramp.
AI Prospects: Regarding AI, I am confident that AMD will execute well on their roadmap and become increasingly competitive with Nvidia. A nice recent development, regarding overcoming the Nvidia "moat", is that InfiniBand now looks to be supplanted by Ethernet in the large scale training clusters, as well as in the data centres where inference happens. On the software side, it also looks good. AI training is a narrow workload, and many players are working to open it up. AMD's own software stack ROCm is progressing fast and already has good support in the core frameworks.
This will only improve. Unlike the impression you get from the market today, there is little to no chance that Nvidia will be able to run further ahead of the competition. In the long run, Nvidias margins or market share will come down — likely both, as I see it.
Future Prospects: So, looking forward, what are AMD's prospects from here? The scenarios I posted back in 2021 (here) have served me well as a way of thinking about my investment, and the likelihoods I put on each scenario, which perhaps seemed overly optimistic back then, seem pretty reasonable now. And here is my update from January this year, which puts the likelihood of staying below $200 at 45% and going above $200 at 55%. I think these numbers are reasonable. Let me know what you all think.
| AMD longterm prospects (3 years) | CAGR | Revenue | GM | EPS | Market cap. | SP | Likelihood | | Pessimistic: Underdog, meek or no growth, precarious future | <10% | <$26B | <50% | <$4 | <$160B | <$100 | 20% | | Stable: Respected competitor in growing markets | 10–30% | $26B–44B | 50–55% | $4–7 | $160B–320B | $100–200 | 25% | | Optimistic: Matches competitors, high margins and solid growth | 30–50% | $44B–67B | 55–60% | $7–9 | $320B–640B | $200–400 | 30% | | Pie-in-the-sky: Overtakes competitors, leading innovation and markets | >50% | >$67B | >60% | >$9 | >$640B | >$400 | 25% |
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