AMD 3rd Quarter

[Sorcery]

I am non-plussed. Record quarterly revenue, profits almost exactly the average of the analyst expectations, goes up a fair bit during the day, falls away after hours and confirmed by a 10%+ fall today. This is not normal. I got exactly what I expected. I’m happy about what AMD’s doing technically and business wise, revenue is in serious ramping mode from a standing start in the data centre. Looks good to me.

The only niggle is their desire to buy anything moving, with a pulse and is congruent with AMD’s desire for knowledge. With probable options presumably for new staff, we the investors are suffering share dilution. I don’t know. Is there anyone with a better explanation?

[g0177325]

No idea, but it is annoying. Alphabet’s beat got them a 3% rise. And Intel and Apple are down on the anticipation of earnings tomorrow I guess.

Nvidia down a bit too (earnings on Nov 20):

[Sorcery]

Well if it helps “youtube moores law is dead”
He’s running a story that Samsung or Apple are perhaps about to buy Intel. Somebody should
Might be good for Apple, as in you need to recycle money.

[alan81]

MSFT down on solid earnings as well.

Apple has never been a “manufacturer”, so I doubt they acquire INTC. The other rumors about Qualcomm and Samsung are unlikely to get regulatory approval. There is also a rumor about a Samsung/Intel JV deal of some sort.

MLID is wrong more often that right so I would take what he says with a grain of salt. There are all sorts of possibilities and rumors if you talk to the rank and file that are unlikely to have any merit.

I think AMD just got ahead of itself as a 10% drop after hitting (even beating) analysts expectations is surprising.

[mschmit]

@alan81

Apple has never been a “manufacturer”

I think Woz made all the first Apple 1 computers
And they did have their own assembly plant for the Apple II, Lisa and early Macs in Fremont

Mike

[caromero1965]

Apple has never been a “manufacturer”

Quite the contrary. They are highly vertically integrated, hardware and software etc… And the M-series Arm chips are all their own designs (for all that they’re fabbed elsewhere).

What I don’t see, though, is how Apple could sop up all the capacity of the fabs that Intel is talking about building. The x86, Gaudi, and arguably graphics parts are all useless to Apple. And I don’t see Apple becoming a manufactuer of parts for others, which they’d probably have to be to afford to own all the fabs Intel’s working towards. And Apple would have to either accept Intel’s probably-inferior processes vs. TSMC, or actually make the Intel processes in flight work.

As for Samsung: They’re not great at fabs at this point, and the only reason they’d buy the Intel fabs is if Intel’s new processes work. Risky. And I don’t think I see the US approving a foreign entity buying Intel’s fabs.

Qualcomm has their hands full right now. But they too wouldn’t want the x86 IP, maybe they’d want the fabs but then they have to run it as a foundry to make the costs work.

I dunno, feels like there’s no natural buyer.

[Vattila]

It was disappointing that the outlook fell below market expectations.

On the other hand, even with the lower outlook and associated growth projection, AMD valuation is low compared to all-time-high — even compared to the 2021-11-30 intraday high ($164.46), which was well before the completion of the Xilinx acquisition. It’s as if the valuation is actually negatively affected by the latter, with the still high amortisation numbers from the acquisition weighing on the GAAP numbers. If that is the case, then we should see better valuation going forward, as the Xilinx-related amortisation eases. It was down to $585M this quarter.

Client Segment: It was nice to see the operating margin recovering a little in the Client segment, but 15% is still dismal. It’s as if they are going to all that trouble competing in that segment for fun only. Intel is still desperate to fill their fabs, I presume, so competition is really tough. The silver lining is that it keeps ARM at bay. But, at the end of the day, AMD is a high- performance computing player, so I don’t think they should play in commodity markets for no profit — unless playing has some clear secondary benefits.

Gaming Segment: Similarly, the Gaming segment annoys me. I cannot understand why they accept these long console cycles from Microsoft and Sony. I would hope they could innovate in the high end and push the boundaries more. Hopefully, sales pick up with the Playstation refresh, but I think AMD needs to get into the driver seat in the gaming segment. In the PC space, Nvidia has shown that there is a premium segment in gaming. AMD needs to bring the premium segment into consoles as well. Have multiple models; entry, mainstream and premium. Push the boundaries at least every second year. The console game developers, who once insisted on a stable platform for 10 years, have presumably now all adopted the PC-like development approach and library abstractions. I would think they could deal with low to premium tier hardware models. If AMD doesn’t innovate here, they risk losing the console segment to mediocrity. Again, they are supposed to be a player in high- performance computing. Other players can probably do cheap and cool better.

By the way, most of the operating expenses in the Gaming segment are related to the discrete gaming GPU developments and marketing, I presume. Operating expenses for the console contracts should be very low. The return on the discrete gaming GPU efforts is disappointing. I suspect this is a segment where Lisa Su has little input and little enthusiasm. And she is yet to find someone with the interest, talent and drive to make something happen here. Radeon looks pretty good to me, so I don’t fault the engineers, but it doesn’t sell for some reason.

Embedded Segment: On the other hand, I still love the operating margin in the Embedded space. Hopefully, revenue will return with the promised strong pipeline of product wins. This business is also wonderfully sticky, with AMD Xilinx having products that no one can match, deployed by customers for decades.

Data Centre Segment: The Data Centre segment is back to the 29% operating margin a year ago, and with the ramp of high margin GPUs, I would expect this to soon surpass the record margin in 2022-Q1.

Here is my updated spreadsheet:

And here is the overview since 2021-Q2:

(My spreadsheet is available at OneDrive.)

I particularly like the nice upswing in operating income, which should continue to grow nicely as GPU sales ramp.

AI Prospects: Regarding AI, I am confident that AMD will execute well on their roadmap and become increasingly competitive with Nvidia. A nice recent development, regarding overcoming the Nvidia “moat”, is that InfiniBand now looks to be supplanted by Ethernet in the large scale training clusters, as well as in the data centres where inference happens. On the software side, it also looks good. AI training is a narrow workload, and many players are working to open it up. AMD’s own software stack ROCm is progressing fast and already has good support in the core frameworks.

This will only improve. Unlike the impression you get from the market today, there is little to no chance that Nvidia will be able to run further ahead of the competition. In the long run, Nvidias margins or market share will come down — likely both, as I see it.

Future Prospects: So, looking forward, what are AMD’s prospects from here? The scenarios I posted back in 2021 (here) have served me well as a way of thinking about my investment, and the likelihoods I put on each scenario, which perhaps seemed overly optimistic back then, seem pretty reasonable now. And here is my update from January this year, which puts the likelihood of staying below $200 at 45% and going above $200 at 55%. I think these numbers are reasonable. Let me know what you all think.

AMD longterm prospects (3 years)	CAGR	Revenue	GM	EPS	Market cap.	SP	Likelihood
Pessimistic: Underdog, meek or no growth, precarious future	<10%	<$26B	<50%	<$4	<$160B	<$100	20%
Stable: Respected competitor in growing markets	10–30%	$26B–44B	50–55%	$4–7	$160B–320B	$100–200	25%
Optimistic: Matches competitors, high margins and solid growth	30–50%	$44B–67B	55–60%	$7–9	$320B–640B	$200–400	30%
Pie-in-the-sky: Overtakes competitors, leading innovation and markets	>50%	>$67B	>60%	>$9	>$640B	>$400	25%

[PieR2]

Current market reaction to the last earnings feels like the market was expecting green shoots of the “nvidia moment” from AMD. This moment is in play and may yet arrive in 2025. They are closing the gap with NVIDIA faster than they closed the gap with INTC. [0 to $5B+ in 1 year]

[Roleplayer]

I have been making games all my life and most of my career.

There are many excellent reasons for AMD to be accepting the console contracts. This has been a steady low effort variable reward source of income for AMD most of this century. That niche is EXTREMELY cyclical, and we are almost if not ripe for another cycle refresh. As the consoles age, the market shrinks because so many people already own the consoles or buy gaming computers instead.

Consoles give nearly the performance of a gaming PC by eliminating alternatives. Every console, and every game for that console, highly optimized so a weaker APU can match the quality of a true gaming computer. But for the most part that console won’t ever improve. Meanwhile, PCs are getting better as fast as if not faster than ever in the metric us gamers care about most: what do we actually perceive in the game, i.e. visual and sound quality.

This is a four year refresh. I’m not following the twitch game market as closely as I used to because I am starting to show signs of Parkinson’s disease, so I don’t know what is coming out. But I was working at Left Field Production when we had first shipping games for the three major consoles in the aughts. Those deadlines are much more fixed than the normal Black Friday annual game launches, and last I heard missing Black Friday generally meant losing 25% of total sales on that game. Sony, Microsoft, and Nintendo don’t waste their precious talent and testing resources on companies likely to miss the date, because doing the work to ship on a new console brings a bonanza of free advertising.

When game companies are not very interested in shipping on a console because PC versions are so much better, that’s when console companies want console refreshes. This year’s, from casual research, seem to be minor refreshes, probably adding AI tools already on APUs used elsewhere onto the consoles. That makes the new chips require even less work than if there is a major architectural change,

So I expect a major bump in console sales (and APU purchases) to be more akin to 2020 (last refresh) than 2024 (long in the tooth). They shouldn’t require many programmers from AMD. There might be, say $6,000,000 in sunk technical employee costs (the new XBox shipped last month) plus wafer costs to get manufacturing profitable. For the next three years, probably no more than half that, at least on the technical side. I only count technical employees as admin and marketing folks have to work on something that will often be AMD’s newest products. And even though the margins are worse than when AMD owned fabs, because the TSMC costs are likely higher but owning fabs only made sense when AMD was selling out, there are lots of other costs involved. Good technical people are IMO the rarer resource based on too many bad experiences with marketing. We used to call those jobs the nepotism tax.

Consoles do not demand rare resources. They don’t need the latest manufacturing process. So in this end of the line quarter, AMD will still make over $13M. It was over 16 times that a year ago. It was almost six times that one quarter ago. Each year after the first of the refresh, it starts dropping.

It is not worth the time and investment to get the twelfth quarter of revenue from new consoles. But aside from possibly the launch quarter, which is often a small fraction of a quarter, quarters 2-11 were worth a lot more. There also aren’t a lot of people buying 2020 gaming laptops (as mine is) today.

Fool on!
Roleplayer

[Sorcery]

My broker showed me 2 yield curves for I25 US Treasuries one month ago and today. For 3 year treasuries, yields are up 0.6% in a month. He blames the interest rates for the headwinds growth companies like AMD are facing. He might be right.

[pauleckler]

The yield curve has been inverted for a while. Short term interest rates have been higher than long term interest rates on the Treasury yield curve. This is indicator of recession.

With the feds pushing down short term interest rates the curve is beginning to return to normal. In particular recent increases in the 10 yr rate has caused the closely watched 2 yr- 10 yr curve to uninvert.

See: Resource Center | U.S. Department of the Treasury

For less than two year, the yield curve is still inverted, but moving in the right direction.

Some say the cause is the federal deficit and heavy govt borrowing to fund the deficit. Rising rates does slow down sales of homes and cars. And reduces calculated future value of growth stocks.

[Vattila]

Thanks for your perspective! I agree, the console contracts constitute a great business for AMD. Like you say, it has low operating expenses and pretty decent income at the peak of the cycle, when console chip revenue is amazing really.

My gripe is not so much with the low margin, but with the long console lifecycle. A teenager should be able to experience at least two buzz cycles before they grow up. Thinking back to my youth and the excitement about the new and upcoming computers, from Commodore 64, to Amiga, to multimedia PCs, it would be great if they could recreate that buzz. For example, Apple has done pretty well with creating regular buzz around their near yearly product releases.

[Roleplayer]

I think I recall that when I was younger, a console cycle was typically 4-5 years. I’m talking 1990s or so. now a full cycle is more like 7 years with a mid cycle refresh about half way through.

I think this is a mid cycle refresh. When I think how much has happened that could significantly affect console performance in the last four year, I forecast that this will be more like a full cycle instead of mid cycle because a lot of the improvements will also seriously speed up older games still being played. The PS promised full compatibility with modern games. I also think (but it’s very late for me after learning the hard way that my character in tonight’s D&D game was built poorly and really needs the next 3-4 upgrades to go into defenses if he is going to go into fights) that value for consoles (TFlop per dollar spent) has been making them increasingly more valuable. So my feeling is this will be better than normal midcycle refresh.

I hold no investments in any of the major console companies at this time, and I do not plan to change my current high safety investments until after the election. My cousin and I are now sharing investment ideas but as it seems likely all my stock accounts (mostly IRAs) will get inherited by our daughter I don’t feel a financial urgency to do the research necessary to badly beat inflation. If I get to visit our daughter in Stockholm (or anywhere else in Europe) next year, I may want to spend the time to increase the money we can spend in travel.