Summary
- Despite 80% YoY increase in Data Center revenue, driven by strong demand for AI computes, the total revenue only grew 2.2% YoY in 1Q FY2024.
- Management expects a slower recovery in the Embedded and Gaming segments in FY2024 following nearly a 50% YoY revenue decline in Q1 FY2024, which continues to impact its revenue growth.
- A tailwind of gross margin expansion was largely offset by strong growth in SG&A expenses, resulting in a muted EBIT margin outlook.
- Despite anticipated earnings rebound in FY2024, AMD’s non-GAAP P/E fwd remains high at 46.8x, comparable to NVIDIA’s 47.3x, and it also sits 38% above the SOXX index.
- AMD stock appears overvalued, as supported by the increase in its valuation multiple alongside downward revisions in revenue and EPS in FY2024 and muted consensus in FY2025.
Investment Thesis
Advanced Micro Devices’ (NASDAQ:AMD) stock has rallied 24% since the beginning of this year. Despite strong growth in AMD’s Data Center, the company’s overall revenue growth has been muted, largely driven by a significant decline in its Gaming and Embedded segments. These two segments accounted for 50% of AMD’s total revenue in FY2023. Management expects continued YoY growth declines and gross margin contraction in the Gaming segment for the remaining quarters of FY2024 due to persistent demand weakness.
Meanwhile, AMD’s EBIT margin remains flat on a YoY basis, delaying a rebound in earnings growth. The stock trading at 10.3x EV/Sales forward and 47x non-GAAP P/E forward, combined with downward revisions in revenue and EPS for FY2024, indicates an overvalued level. Therefore, I initiated a sell rating on the stock. Although the strong Data Center outlook will boost the company’s top-line growth, it will be largely offset by significant declines in the Gaming and Embedded segments.
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