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Msg  1339 of 1503  at  5/27/2022 1:50:13 PM  by

ChrisC-R


SA: AMD: Read Off Nvidia's Earnings

 

AMD: Read Off Nvidia's Earnings

Summary

  • AMD-competitor NVIDIA cut guidance for the current quarter below analyst estimates due to a revenue shortfall from Russia and China.
  • AMD only reported 3 weeks ago and didn't see similar impacts on gaming sales in China.
  • The stock isn't priced for the chip company to even match conservative analyst estimates, reducing the risk of a major hit to the stock price.
  • AMD continues to trade at only 17.4x our '23 EPS targets despite the superior sector results.
  • This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »
Graphics Chip Maker Nvidia Reports Quarterly Earnings

Justin Sullivan/Getty Images News

Chip stocks initially fell after market leader NVIDIA Corporation (NVDA) cut numbers for the current quarter. Naturally, the market reacted negatively, selling off competitor Advanced Micro Devices, Inc. (NASDAQ:AMD) in the process. However, that reaction wasn't rational, with the stock already down 50% from the highs. My investment thesis remains ultra-Bullish even after the stock has rallied to $99 following the market realization that the negative guidance from NVIDIA wasn't so bad.

AMD chart

Source: FinViz

Not So Bad

NVIDIA reported FQ1'22 revenues that easily beat estimates by $190 million; EPS topped estimates at $1.36. The chip company, though, somewhat shocked the market with guidance for FQ2'23 revenues of only $8.1 billion versus consensus up at $8.44 billion.

Investors need to understand the consensus estimate forecast nearly 30% revenue growth for the quarter. The new guidance places revenue growth at a still very strong 25% clip while forecasting a $500 million sales reduction from the Russia situation and China's lockdowns.

Based on the recent guide-downs from Snap Inc. (SNAP) and the weakness in the crypto world, the market likely was expecting some weakness in the GPU segment. CEO Jensen Huang claimed the gaming-segment demand remained strong despite market concerns. Some of the weakness assigned to China, though, could be related to actual lower demand for crypto GPUs from miners, not the Covid-19 lockdowns. Per the CFO in the FQ1'23 commentary, Colette Kress was clear the cryptocurrency mining sales are difficult to track:

Our GPUs are capable of cryptocurrency mining, though we have limited visibility into how much this impacts our overall GPU demand. Volatility in the cryptocurrency market - such as the recent declines in cryptocurrency prices or changes in method of verifying transactions, including proof of work or proof of stake - can impact demand for our products and our ability to accurately estimate it. Most desktop NVIDIA Ampere architecture GeForce GPU shipments were Lite Hash Rate to help direct GeForce GPUs to gamers.

In the quarter, NVIDIA claimed the Cryptocurrency Mining Processor revenues were nominal in the quarter, down from $155 million a year ago. This data would support a slowdown in PC gaming revenues.

The numbers are interesting, considering AMD reported Q1'22 results back on May 3. The chip company reported for a slightly different period, with their quarter ending in March versus April for NVIDIA, but AMD didn't see any problems from Russia or China. Or, at least, the weakness wasn't enough to overcome strength in other areas.

At the time, AMD guided for the year to organic growth of ~34%, up from a prior guidance of 31%. CEO Lisa Su discussed a market still lacking in supply, with the company having more demand than the chips supplied to it by Taiwan Semiconductor Manufacturing Company Limited (TSM).

As well, AMD will benefit from some momentum of reporting Xilinx revenue in 2022 results. The market loves growth whether via organic revenue or not, and AMD will actually report official revenue growth in the 60% range.

Nvidia's reported quarterly revenue trends do not indicate any weakness in the business through the period ending May 1. The company saw the majority of sales growth via the Data Center segment, where sales continued to surge to $3.75 billion versus only $3.26 billion in the prior quarter.

Revenue By Markets slide

Source: NVIDIA FQ1'23 trends

If NVIDIA continues to see strong growth in the Data Center sector as forecasted, AMD shouldn't see any major impact to revenues going forward. A lot of the weakness for NVIDIA is related to PC gaming revenue in China, which is not as likely to impact AMD.

The chip company could face impacts from lower console sales. AMD has seen the EESC business surge to $2.5 billion quarterly due to datacenter revenues and console sales. The Computing and Graphics business was made up mostly of sales of Ryzen CPUs.

AMD revenue by segment

Source: Next Platform

AMD would face more pressure from the NVIDIA results if the latter's weakness was from the datacenter segment. Not to mention, China has had various lockdowns for a couple of months, but the Shanghai and Beijing lockdowns didn't start until early April, with the biggest combined impact in late April and May. A quick reopening could limit the ultimate impact and any spillover to the results for AMD.

Better Odds

Based on the NVIDIA numbers, AMD is a better investment option here. The stock is vastly cheaper at ~20x forward EPS estimates versus NVIDIA at over 26x estimates.

AMD vs NVIDIA in PE ratio
Data by YCharts

In addition, AMD appears to have better odds of meeting revenue targets, though the lockdowns in China could definitely end up impacting AMD as well. CEO Lisa Su is very conservative in guiding financial targets. The most likely outcome following the Q2'22 report is for the chip company not guiding up to further revenue gains for the year versus a trend of major revenue hikes in the last couple of years.

The stock might not be spared a selloff on any cut guidance, but AMD is a far better value with larger organic growth in the current period. The stock with the faster growth typically doesn't trade at a far lower P/E multiple.

The market hasn't caught on to AMD's guidance to mid-30% organic growth while NVIDIA placed growth at 25%. AMD remains in a cycle of taking premium PC and server CPU market share from Intel (INTC), providing some potential extra growth even during a tough economic climate.

Also, my previous research had forecasted far higher EPS targets for 2023 than what analysts currently predict at just $4.99. If AMD meets the analyst targets, the stock is cheap. If AMD matches our estimates at $5.68 per share, the stock should soar.

Note, the consensus estimates have AMD growing EPS by over 50% this year while NVIDIA is only forecast for 20% growth. AMD continues to expand margins from selling more premium PC chips along with larger amounts of server chips, not to mention the synergy benefits of the merger with Xilinx.

Investors should definitely prepare for a cut to growth targets for 2022, but the stock is already baking in a big revenue and EPS miss. AMD only trades at 20x analyst targets for 2023, providing one of the better bargains in the market.

Heck, NVIDIA is the company that cut revenue targets for the quarter, not AMD. AMD is the one that now deserves the premium forward P/E multiple in the sector.

Takeaway

The key investor takeaway is that AMD didn't predict any plateau in the business only 3 weeks ago. Investors should use any weakness to continue building a position in the chip stock. China starting to reopen Shanghai could limit any damage during Q2'22 as Chinese consumers catch up on purchases. Any negative read-through from the NVIDIA guidance shouldn't greatly impact AMD after the stock has already traded down 50% from the all-time high.



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