Update shared on14 Oct 2024
Fair value Increased 6.72%AMD Datacenter Segment takes the Lead as Gaming and Embedded Remain in a Slump
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AMD continues to execute well and reported impressive second-quarter results, despite two segments once again doing all the heavy lifting.
The datacenter segment reported quarterly revenue of $2.8 billion, up 115% over 12 months. The segment accounted for 49% of revenue compared to 25% a year ago. I think Nvidia’s position in the AI processor market is safe, but AMD is participating more than I thought it would during this investment cycle.
The client segment reported year-on-year sales growth of 49% (vs. 85% in the first quarter). This was way ahead of Intel’s 9.5% YoY growth, as AMD’s Ryzen processors continued to eat into Intel’s market share. Intel’s new Lunar Lake processors hit the market just before the end of Q3, so the battle for PC market share is back on. The increased completion won’t affect either company’s Q3 results, but Q4 guidance might give us some clues.
The gaming and embedded segments are still stuck in an industry-wide slump and reported sales down 59% and 41% respectively. AMD’s revenue mix has been turned on its head, and these two segments accounted for just 25% of sales compared to 56% a year ago. This means further weakness will have less impact - but it also means a recovery will have little impact.
In August AMD acquired ZT Systems, a server builder, for $4.9 billion. This should help AND provide more comprehensive solutions, rather than just components. I think this is a good strategy, and necessary as competitors are also investing heavily to develop an ecosystem around their products.
Overall I think AMD is executing well - but I still believe competing in this market will be very expensive and will continue to eat into the company’s margins. I’m increasing my 5-year revenue growth projection to 16% (from 14.5%) as AMD is participating more in this phase of the AI investment cycle.
I’ve also rebased my valuation calculation to Q2 2024’s 12-month revenue and pushed the target date out to June 2029. I’m maintaining my assumption that the net profit margin after five years will be 17% and that AMD will trade for 30x earnings. This means my fair value estimate is now $106.50, up from $89.
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