With the ongoing market turmoil, investors continue to sit on the sidelines with cash in hand, looking for signs of a turnaround. But why wait when there are deals around like Advanced Micro Devices (Advanced Micro Devices Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMD)? That’s the advice from portfolio manager JoAnne Feeney who just nominated AMD as one of her top picks for the year ahead, saying despite near-term headwinds the chip-maker has an extremely good outlook.
“AMD had to announce that the consumer side of their business as opposed to servers side is seeing more weakness than they anticipated,” said Feeney, partner at Advisors Capital Management, who spoke on BNN Bloomberg on Friday where she named AMD a top pick for the next 12 months. “We’d heard that earlier from Nvidia and now we’re seeing it in AMD, and so, the whole group is selling off based on those consumer concerns.”
“But again, for the long-term investor you don’t care about this year — you care about the next three to five years. And as AMD holds onto its lead, which they should do for several more years, they are likely to continue to take share from Intel in the highest margin, highest profitable chips that are out there in the world,” she said.
Santa Clara-headquartered AMD saw its share price plunge almost 14 per cent on Friday as the market reacted to preliminary third quarter numbers which said revenue would be coming in lighter than expected. Management had previously guided for $6.7 billion for the third quarter but now is expecting about $5.6 billion, with the drop chalked up to a weaker than expected personal computing market and resulting inventory corrections across the PC supply chain. Gross margins were also expected to come in lower than previously guided at around 50 per cent compared to the previous call at about 54 per cent.
“While our product portfolio remains very strong, macroeconomic conditions drove lower than expected PC demand and a significant inventory correction across the PC supply chain,” said AMD Chair and CEO Lisa Su in a press release.
“As we navigate the current market conditions, we are pleased with the performance of our Data Center, Embedded, and Gaming segments and the strength of our diversified business model and balance sheet,” Su said.
AMD saw overall revenue jump an impressive 70 per cent year-over-year in its second quarter 2022 results, released in early August. There, its $6.6 billion topline featured revenue from its Data Center business up 83 per cent to $1.5 billion, its Client segment up 25 per cent to $2.2 billion, Gaming was up 32 per cent to $1.7 billion and Embedded revenue came in at $1.3 billion. Net income was $447 million compared to $710 million a year earlier and diluted earnings per share was $0.27 compared to $0.58 a year ago.
Feeney said AMD is asserting its dominance on a number of levels in the semiconductor space, with a long runway of success ahead of it which should be attractive to investors.
“The reason to like AMD is first of all to understand that AMD and Intel are the main providers of central processing units or microprocessors, not just to PCs and game consoles but also to servers. And AMD, after much effort over many years under new management has really re-acquired its leadership role,” Feeney said.
“Intel is primarily the player in server chips and had 95-plus per cent of that market, but AMD has now leapfrogged Intel, and so that’s why we like AMD for clients,” she said. “We do not like Intel here. It’s going to take them a long time to recover from these missteps. But AMD is taking market share from Intel and it’s doing so with the highest return products now right now.”
“[AMD] has been on sale and especially so [on Friday],” she said.
With a market cap of about $93 billion, AMD had been a gem of a stock to own for a good half-decade between 2016 and 2021, generating a combined return of over 7000 per cent over that period. Early in the pandemic was also good for AMD, but the past 11 months have been less rosy, as has been the case for most tech stocks. Since last November, AMD is now down about 64 per cent.
And despite the global chip shortage and other supply chain concerns, business has clearly booming for AMD. Sales have gone from $6.73 billion in 2019 to $9.76 billion in 2020 to $16.48 billion in 2021, and with management having guided for 2022’s full-year revenue at $26.3 billion, although that guidance came before last week’s update. There, AMD said its lowered expectations on gross margin were the result of lower Client processor unit shipments and average seller price (ASP).
Feeney said that excess PC inventory is just part of the process of being in the semiconductor space for AMD.
“They come out with new chips every year, so the chips they have this year, they can’t just say ‘Okay, we’ll wait and sell them next year.’ They’re going to have to write those down and try to get them out of their inventory so that when next year’s chips come along they’ll be able to sell them at top prices,” Feeney said.
“We do think the margins will go back up from here. They’ve also become a lot more efficient. The operating margins have improved and should continue to improve over the course of the next few years,” she said.