Advanced Micro Devices Inc (AMD) USD0.01

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AMD’s third quarter revenue increased by 18% to $6.8bn, in the upper half of the company’s guidance range. The performance was driven by strong growth in both Data Center and the personal computing focussed Client division, which helped to offset large declines in Gaming.

Underlying operating profit grew by 34% to $1.7bn, driven by the uplift in revenue which more than offset a relatively modest increase in operating costs.

Free cash flow was up by $0.2bn to $0.5bn. AMD ended the period with net cash of $2.8bn.

The company spent $0.7bn on share buybacks over the quarter.

Fourth-quarter revenue is expected to land between $7.2bn and $7.8bn, which at the mid-point would be growth of 22%, slightly below the level analysts had been expecting.

The shares fell 7.6% in after-hours trading.

Our view

AMD’s third quarter saw a further acceleration in both revenue and profit growth, but this wasn’t enough to keep investors happy. Instead, the market chose to focus on slightly lower-than-expected guidance for the final three months of the year. Still, growth in the low 20s is no bad target.

We think Data Center sales will remain the key growth driver for some time to come, driven by not just the boom in all things Artificial Intelligence (AI), but also our relentless thirst for digital content. We’re also encouraged by recent trends in the Client division where the integration of AI at the device level is helping to reignite growth after a torrid time for the personal computing industry.

AMD 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.

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 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. In terms of both market position and technological prowess we think it has played a second fiddle at times to NVIDIA, for whom analyst growth forecasts imply a high rating is better deserved. While the business is certainly making good progress, this does leave AMD vulnerable to disappointments and the focus should be on the long term.

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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