AMD's Strong Sales Disguises Operating Margin Concerns

AMD's stock price declined despite Q2 sales exceeding estimates, due to lower operating profit margins resulting from US chip restrictions to China. The company's earnings were poorly received by investors, despite topping sales estimates.

Advanced Micro Devices (AMD) experienced a significant drop in its stock price on August 6, 2023, despite reporting Q2 sales that exceeded market expectations. The company's stock fell by more than 6% in early trading, primarily due to lower operating profit margins resulting from U.S. chip export restrictions to China [1].

AMD's Q2 earnings report revealed that the company's Data Center segment revenue stood at $3.2 billion, which was in line with Wall Street's expectations. However, the adjusted earnings per share (EPS) fell short of analyst expectations, with the company posting an EPS of $0.48 on revenue of $7.6 billion. Despite these setbacks, the company provided better-than-expected Q3 guidance, forecasting revenue between $8.4 billion and $9 billion [1].

The primary reason for the stock price decline was the impact of U.S. export restrictions on the company's MI308 AI chips, which were destined for China. This ban resulted in an operating loss of $155 million in the quarter. The company also reported an $800 million inventory write-down due to these restrictions [1]. The Trump administration reversed the ban on these chips last month, which should help mitigate some of the losses in the coming quarters [1].

AMD's Client business, which includes sales of CPUs for desktops and laptops, generated $3.6 billion in revenue, surpassing expectations by $1 billion. This segment benefited from a recovery in the broader PC market and new product launches [1].

Despite the challenges, AMD's strong growth in the Client and Gaming segment, along with record free cash flow, drove investor confidence. The company's gross margin, however, fell to 40% due to the $800 million inventory write-downs, which would have reached roughly 54% without the disruption [2].

The company's AI innovation, including the launch of the MI350 line of AI chips, is expected to enhance its competitive position in the AI server market. The MI350 line offers four times the AI compute performance and a 35x increase in inferencing capabilities compared to its predecessors [1].

AMD's Q3 guidance for revenue of around $8.7 billion, plus or minus $300 million, indicates strong confidence in its AI, data center, and processor businesses. However, investors remain cautious about potential export approvals and the intensity of competition in the AI chip space [2].

In comparison to its peers, AMD's 32% year-over-year (YoY) revenue growth was impressive but still lagged behind Nvidia's 122% growth in the same segment. Nvidia's gross margin remains significantly higher at 75% [2].

Investors should watch for updates on China export licenses, the ramp-up of MI350 and MI400 AI accelerators, data center share gains, gross margin recovery, Q3 execution against guidance, partnership developments, and competitive responses from Nvidia and Intel [2].

References:
[1] https://finance.yahoo.com/news/amd-stock-falls-more-than-6-on-disappointing-q2-data-center-results-202215407.html
[2] https://www.indmoney.com/blog/us-stocks/amd-stock-falls-5-after-q2-earnings