AMD Failed To Meet Lofty Expectations

At the end of April, Advanced Micro Devices Inc AMD failed to impress, unlike Nvidia Corporation NVDA that has been crushing investor expectations on the back of soaring AI chip sales for quite a while. It’s no secret that AMD trails the undoubtable leader Nvidia that holds as much as 80% of the thriving market for AI server semiconductors.

First Quarter Highlights

For the March quarter, AMD reported revenue rose 2% YoY to $5.47 billion that slightly surpassed LSEG’s estimate of $5.46 billion.

Unlike last year’s comparable quarter when it made a net loss of $139 million, or 9 cents per share, AMD reported a net income of $123 million, or 7 cents per share.

Adjusted earnings amounted to 62 cents per share, slightly surpassing 61 cents a share analysts expected.

Data center revenue jumped 80% to $2.3 billion thanks to AMD's MI300 series of AI processors that challenge Nvidia and its graphics processing units. CEO Lisa Su revealed that AMD’s MI300X is being used by Microsoft Corporation MSFT, Meta Platforms META, and Oracle Corporation ORCL. Since the launch which took place during 2023’s fourth quarter, AMD sold over $1 billion worth of chips.

But it was not enough to offset weakness in the traditional server market. Moreover, AMD’s results were also hurt by gaming revenue that tanked as much as 48% to $922 million.

AMD already guided significant double-digit percentage declines in this segment due to revenue from the chips it designs for gaming consoles such as Xbox from Microsoft Corporation and PlayStation 5 from Sony Group Corporation SONY already hitting their peak. This year marks the fifth year since the most recent generation of gaming consoles has been released and AMD's videogame console revenue peaks after roughly four years.Moreover, a report from research firm Newzoo that was published in April revealed that gamers are clocking in less hours. Newzoo expects personal computing and console gaming revenue growth to continue lagging pre-pandemic levels through 2026. Year to date, industry giants like Sony and Electronic Arts have laid off hundreds of employees. Sony Group is scheduled to report its fiscal fourth quarter earnings on Tuesday. All eyes will be on the profitability of the gaming division as PlayStation 5 promotions ate into profits during the third quarter. When it reported its third fiscal quarter results, Sony lowered projections of PlayStation 5 sales and gaming revenue for the rest of the fiscal 2023.

Revenue from the embedded segment that consists of networking chips also plummeted 46% to $846 million, with demand for the segment already expected to remain soft throughout the first half of the year. Revenue was additionally hit from ongoing inventory corrections from this segment as clients clear out a build-up of chips.

A Guidance That Failed To Impress

For the full year, AMD expects AI chip sales of about $4 billion, raising its prior estimate by $500 million. As for the second quarter, AMD guided revenue of about $5.70 billion, plus or minus $300 million which is in line with LSEG’s average estimate. 

On an adjusted basis, AMD guided for second quarter’s gross margin of about 53%, hardly beating the estimate of 52.9%.

In simple words, investors were expecting a stronger demand pipeline for AMD’s AI-related products and were disappointed were AMD being slower than Nvidia.

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