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AMD Hit by Waning Gaming Demand: What's Next for the Chipmaker?

By The Tokenist (Shane Neagle)Stock MarketsNov 01, 2023 14:09
ca.investing.com/analysis/amd-hit-by-warning-gaming-demand-whats-next-for-the-chipmaker-200583431
AMD Hit by Waning Gaming Demand: What's Next for the Chipmaker?
By The Tokenist (Shane Neagle)   |  Nov 01, 2023 14:09
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Advanced Advanced Micro Devices (NASDAQ:AMD), a primary competitor to Intel (NASDAQ:INTC) in the computer processor market, provided a less optimistic revenue forecast for the current quarter. The company cautioned that demand for gaming machines is slowing, which had an impact on its stock performance.

As a result, the company’s stock fell about 2% in early trade on Wednesday. While shares initially contracted as much as 5%, the stock pared some losses on optimistic comments during the earnings call about demand for high-end AI chips.

How Did AMD Perform in Q3?

While AMD reported revenue for the third quarter that beat the average analyst estimate, the company’s revenue outlook for this quarter was soft. For the third quarter, AMD said its sales rose 4.2% to $5.8 billion, ahead of the consensus of $5.7 billion.

The company’s largest business – Data center – saw its fall 0.7% to $1.6 billion, just below the expected $1.62 billion. Similarly, Gaming revenue fell nearly 8% from the year-ago period, while analysts were looking for $1.53 billion.

Even as the gaming sector posed challenges in Q3, AMD demonstrated its innovative edge and market agility with the recent release of the AMD Radeon RX 7900M, a testament to its ongoing efforts to diversify and capture new market segments.

Embedded revenue also declined, falling 4.6% YoY to $1.24 billion, below the expected $1.31 billion. These misses were offset by Client revenue, the segment which rose 42% YoY and easily topped the expected $1.23 billion. The Client segment includes sales from PC processors.

“We delivered strong revenue and earnings growth driven by demand for our Ryzen 7000 series PC processors and record server processor sales,” said AMD Chair and CEO Dr. Lisa Su.

“Our data center business is on a significant growth trajectory based on the strength of our EPYC CPU portfolio and the ramp of Instinct MI300 accelerator shipments to support multiple deployments with hyperscale, enterprise and AI customers.”

AMD’s adjusted gross margin expanded by 100 basis points YoY to 51%, in line with expectations. The adjusted operating margin, on the other hand, declined by 100 bps to 22%, better than the expected decline to 21.6%.

Shares were especially hit after AMD said it expects its Q4 revenue to come in between $5.8 billion and $6.4 billion, worse than the expected $6.4 billion. AI GPU sales for this quarter are expected to come in at $400 million while the Data Center segment is expected to grow by a “strong double-digit percentage.”

"In the fourth quarter, we expect to see strong growth in Data Center and continued momentum in Client, partially offset by lower sales in the Gaming segment and additional softening of demand in the embedded markets,” said AMD EVP, CFO and Treasurer Jean Hu.

Revenue was impacted by the softening demand for semi-custom chips, which are for example used to power Sony’s PlayStation 5. AMD said the sales decline was expected to a certain extent given that we are now in the fourth year of the console cycle.

Moreover, AMD said that Q4 revenue will be impacted by continued weakness in the Embedded business, which is expected to decline due to additional softening of demand.

AI Demand Not Yet Reflected in Guidance

While AMD’s Q4 sales outlook failed to entice investors, the company’s stock did react positively to the comment on the call that the management sees AI GPU sales exceeding $2 billion next year.

“This growth would make MI300 the fastest product to ramp to $1 billion in sales in AMD history,” said Su on the call with analysts.

The management said it has secured commitments from multiple large hyperscale customers to deploy its Instinct MI300 accelerators, which are based on the latest ROCm software suite.

“We made significant progress in our Data Center GPU business in the third quarter as the multiyear investments we have made in our hardware and software road maps resulted in significant customer traction for our next-generation Instinct MI300 accelerators and particularly our Instinct MI300X GPU that delivers leadership inferencing and training performance,” she added.

The company has already started to ship Instinct MI300A APUs, which are supporting the El Capitan Exascale Supercomputer. On the other hand, AMD is “on track” to start production shipments of Instinct MI300x GPU accelerators. Su said that the company’s large customers (likely Microsoft (NASDAQ:MSFT)) should get the product first, which is expected “in the coming weeks.”

The progress on the AI front comes after AMD made strategic acquisitions of startups Mipsology and Nod.ai. The former Mipsology is AMD’s long-standing partner with a track record of expertise in providing AI software and solutions in the areas of data center, edge, and embedded markets.

On the other hand, Nod.ai brings a highly experienced team known for their substantial contributions to open-source AI compilers and industry-leading software, which is already in use by many major cloud enterprise and AI companies.

Su said that Nod.ai’s software “can significantly accelerate the deployment of highly performant AI models optimized for our Instinct, Ryzen, EPYC, Versal, and Radeon processors.”

Conclusion

AMD shares fell modestly after the company offered a soft sales outlook for this quarter as strong demand for its high-end AI chips and Zen 4 family of products is partially offset by lower sales in the Gaming segment and continued softening of demand in the embedded market.

Still, the stock was able to maintain its strong year-to-date gains (+52.1%) as investors remain long-term bullish on AMD given server CPU share gains and strong momentum in Data Center GPUs.

***

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

AMD Hit by Waning Gaming Demand: What's Next for the Chipmaker?
 

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AMD Hit by Waning Gaming Demand: What's Next for the Chipmaker?

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