AMD Priced to Reflect Perfect Financial Foundations
AMD's Q2 revenue growth has been impressive, with a 31.7% Year-over-Year (YoY) increase, according to recent reports. However, the company's performance during the last four months of the year has been less convincing, with win rates below 50% over the past decade.
The strong growth can be attributed to AMD's Data Center division, which saw a 14% YoY revenue growth. This growth, however, pales in comparison to Nvidia's Data Center revenue, which experienced a 56% YoY sales spike.
One of AMD's significant acquisitions, the Embedded segment (Xilinx), was acquired less than four years ago for a staggering $50 billion. Unfortunately, the segment's revenue has dropped from almost $1.5 billion to $0.8 billion within just two years. The Embedded segment also saw a 4% YoY revenue decline and operating income dropping significantly.
AMD's stock has gained around 33% since early June, but the company's TTM profitability metrics are lower than historical averages despite the revenue growth. The normalized earnings yield is much lower than its historical average, indicating overvaluation. In contrast, Nvidia's normalized earnings yield is significantly higher, suggesting a more fair valuation. AMD's forward P/E ratios are approximately in line with Nvidia's, despite a gap in the strength of their fundamentals.
The client and Gaming revenue of AMD saw a 69% YoY growth, which is likely explained by seasonality. This growth, however, may not be sustainable in the long term.
The Data Center business is becoming increasingly competitive, with tech giants like Google and Amazon developing their own data center processors to become more cost-efficient. Chinese tech giants could also pose a potential threat in the data center business. The competition is intensifying, with new competitors having vast financial resources and the ability to attract top industry engineers.
Notable competitors like QUALCOMM Incorporated (QCOM) are preparing to re-enter the data center business, while Broadcom Inc. (AVGO) has secured new multi-billion dollar orders for its cutting-edge XPUs.
AMD's management should worry about the company's prospects to capitalize on AI tailwinds due to increasing competition. Wall Street analysts have a 'Buy' rating for AMD and an average target price 16.7% higher than the last close. However, some analysts view AMD as a 'Strong Sell' opportunity due to its vulnerable business mix and potential misleading headline Q2 earnings numbers.
In conclusion, while AMD's Q2 earnings show promising growth, the company faces significant challenges in the Data Center business, particularly with the intensifying competition and the massive multi-trillion AI infrastructure market potential.
