Advanced Micro Devices Inc (AMD) USD0.01

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AMD’s second quarter numbers came in ahead of expectations. Sales grew 7% to $5.8bn as its Artificial Intelligence business continued to accelerate. Data Center sales more than doubled, which when combined with a strong performance in the Client segment, more than offset weakness in Gaming and embedded sales.

Underlying operating profit of $1.3bn was up by 18% helped by an improved gross profit margin.

Free cash flow increased by $185mn to $439mn and net cash stood at $3.6bn. The company repurchased $352mn of its own shares in the period.

AMD expects third quarter revenue of around $6.8bn, slightly ahead of consensus estimates, and a gross margin of approximately of 53.5%.

The shares were up 9.3% in pre-market trading.

Our view

AMD’s second-quarter update saw profits start to move in the right direction. Sentiment towards the shares has been weak of late but markets have reacted well to the results. A year ago, the Data Center division was only the third-largest revenue generator in the group. It’s now the largest, accounting for nearly half of total sales. We think that’s a good thing, and if the strong momentum continues, growth rates at the group level are likely to improve.

This microchip designer offers a comprehensive range of microprocessors and graphics cards, and is one of the few players with the technology capable of powering the latest advances in artificial intelligence (AI), where demand is booming.

There’s a massive opportunity here with big tech names such as Meta, Microsoft and Google owner Alphabet all aggressively increasing their multi-billion dollar budgets for AI infrastructure. AMD has a long way to go if it’s to unseat rival NVIDIA’s dominance in this space, but we think the market is certainly big enough for two, and AMD is being increasingly recognised for being a cost-effective option.

AMD doesn’t manufacture its own products. That means supply chain challenges and the industry’s ongoing reliance on Taiwan, where geopolitical tensions are elevated, remain a risk to be mindful of.

Beyond Data Center, AMD’s broad offering gives it an opportunity to integrate technology across the technology stack, which could drive growth in other product categories. It continues to innovate in the personal computing space, and has just launched an upgraded AI processor that’s being rolled out by the likes of HP and Lenovo.

However there are some ongoing headwinds. Weak sales of AMD’s gaming chips are detracting from the strong growth seen elsewhere. And with no major console releases on the immediate horizon, this may remain the case for some time. There’s also weak demand from some customers in the Embedded segment like automobile manufacturers.

The pace of innovation in the industry is high and AMD is ploughing some $1.5bn per quarter into research & development. The strong balance sheet means it can afford to do this and stomach fluctuations in demand, but for now payouts to shareholders are unlikely to be a priority.

AMD’s valuation is broadly in line with the peer group. But at around 30 times expected earnings, there’s pressure for future sales growth to accelerate beyond the modest levels that current forecasts are suggesting for this year. The business is certainly making good progress, but there’s significant execution risk which leaves the valuation vulnerable to disappointments.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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