AMD Drops 4% as Earnings Fail to Live Up to Lofty Expectations

Advanced Micro Devices (AMD), a leading semiconductor company, has announced its financial results for the third quarter of 2023.

The company reported revenue of $5.8 billion, representing a growth of 4.2% year-over-year and surpassing market expectations of $5.7 billion. Key highlights of the report include strong performance in the data center and client segments, offset by declining sales in the gaming and embedded segments.

On a non-GAAP basis, gross margin 51%, in line with expectations. Non-GAAP operating income was $1.3 billion, net income was $1.1 billion, and diluted EPS was $0.70, indicating a significant improvement in profitability compared to the previous year. 

CEO Dr. Lisa Su highlighted the revenue and earnings growth achieved in Q3, emphasizing that it was driven by the demand for Ryzen 7000 series PC processors and record server processor sales. Dr. Su also mentioned the data center business's growth trajectory based on the strength of the EPYC CPU portfolio and the upcoming deployment of Instinct MI300 accelerator shipments.

The Data Center segment of AMD's business reported revenue of $1.6 billion, remaining flat year-over-year. Although 4th Gen AMD EPYC CPU sales showed growth, it was offset by a decline in adaptive System-on-Chip (SoC) data center products. Sequential growth of 21% was observed due to accelerated customer adoption of 4th Gen AMD EPYC CPUs during the quarter. The company expects continued growth in the Data Center segment, supported by the strength of its EPYC CPU portfolio and the forthcoming volume production of Instinct MI300 accelerators, which will cater to hyperscale, enterprise, and AI customers.

The Client segment, which includes sales of processors for personal computers, experienced robust growth with revenue of $1.5 billion, representing a year-over-year increase of 42%. This growth was primarily driven by higher sales of Ryzen mobile processors. Sequentially, the segment saw a 46% increase in revenue due to rising sales of AMD Ryzen 7000 Series CPUs. The Client segment's strong performance is indicative of the high demand for AMD's PC processors.

The Gaming segment reported revenue of $1.5 billion, showcasing a decline of 8% year-over-year. This was primarily attributable to a decrease in semi-custom revenue, although it was partially offset by increased sales of AMD Radeon GPUs. Sequentially, the Gaming segment revenue declined by 5% due to lower semi -custom sales. The gaming market remains a key focus for AMD, and the company is expected to regain momentum in this segment.

Within the Embedded segment, revenue reached $1.2 billion, down 5% year-over-year. This decline was primarily attributed to decreased revenue in the communications market. Sequentially, the segment's revenue decreased by 15% due to inventory corrections at customers in various end markets. 

Looking forward, AMD expects even stronger growth in the Data Center segment and continued momentum in the Client segment for the fourth quarter of 2023. However, the company does anticipate lower sales in the Gaming segment and additional softening of demand in the embedded markets. 

Looking ahead to the fourth quarter of 2023, AMD expects revenue to be approximately $6.1 billion, with a midpoint growth rate of 9% year-over-year and approximately 5% sequentially. The company anticipates strong growth in the Data Center segment and continued momentum in the Client segment. However, it expects lower sales in the Gaming segment and a further softening of demand in the embedded markets. Non-GAAP gross margin is projected to be approximately 51.5%.

Shares of AMD slipped 4% in reaction to the news as expectations were high. The stock is testing support at the $93 area which lines up as key support. The stock has lingered below the 200-sma ($99.91) for the past week. If it is able to hold $93, it may mount a push toward that resistance level, but these results and outlook may not be strong enough to push it above that resistance unless the broader markets are able to catch a bid. 

In summary, AMD's third-quarter results reflect strong revenue and earnings growth driven by robust performance in the data center and client segments. While the gaming and embedded segments faced challenges, the company's overall outlook remains positive with anticipated growth in the coming quarters. The company's focus on high-performance processors for PCs, data centers, gaming, and embedded markets has contributed to its success so far, and AMD remains optimistic about its future prospects.