Leading chip manufacturer Advanced Micro Devices, Inc. (AMD) has made significant progress in accelerating its adoption of artificial intelligence (AI) and customer engagements. However, the company’s recent financial performance shows a decline in revenues and EPS, along with challenges in the Client segment and acquisition-related costs.

Following a boost in PC sales during the pandemic, the market is witnessing a downturn. This has led buyers of AMD’s PC chips to pull back even harder than consumers to reduce inventory levels to reflect the weak demand environment.

Global semiconductor revenue is projected to decline 11.2% in 2023, according to the latest forecast from Gartner, Inc.

Practice Vice President at Gartner, Richard Gordon, stated, “The semiconductor industry is facing a number of long-term challenges in the decade to come. The past decades of high volume, high-dollar content market drivers are coming to an end, notably in the PC, tablet, and smartphone markets where technology innovation is lacking.”

The drop in demand has created a setback for companies like AMD that are somewhat dependent on the PC market. Moreover, amid lingering concerns of the economy entering a recession, the company could remain under pressure.

AMD’s stock has gained 21.1% over the past year and marginally over the past month to close its last trading session at $114.40.

Disappointing Financials 

For the fiscal first quarter ended April 1, 2023, AMD’s non-GAAP revenue declined 9.1% year-over-year to $5.35 billion. The company’s non-GAAP operating income declined 40.2% year-over-year to $1.10 billion. Its non-GAAP net income fell 39% year-over-year to $970 million. In addition, its non-GAAP EPS declined 46.9% year-over-year to $0.60.

Unfavorable Estimates
Analysts expect AMD’s EPS and revenue estimates for the quarter ended June 30, 2023, to decline 45.3% and 18.7% year-over-year to $0.57 and $5.32 billion, respectively.

High Valuation

In terms of forward non-GAAP P/E, AMD’s 39.42x is 64.7% higher than the 23.94x industry average. Its 7.77x forward EV/Sales is 165.2% higher than the 2.93x industry average. Moreover, its 27.73x forward EV/EBITDA is 86.9% higher than the 14.84x industry average.

Bleak Profitability

AMD’s 0.73% trailing-12-month EBIT margin is 83.6% lower than the industry average of 4.43%.

Its 0.18% trailing-12-month Return on Total Capital is 89.8% lower than the industry average of 1.78%. Also, its 0.34x trailing-12-month Asset Turnover Ratio is 44.1% lower than the 0.61x industry average.

POWR Ratings Show Weakness

It’s no surprise that AMD has an overall D rating, equating to a Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a D grade for Value and Stability, justified by its high valuations and a beta of 1.83.

Within the Semiconductor & Wireless Chip industry, AMD is ranked #82 of 92 stocks. Click here to access AMD’s ratings for Growth, Momentum, Sentiment, and Quality.

Bottom Line

While AMD reported a bleak first-quarter financial results, the company could continue to remain under pressure in the upcoming quarters. The weakness in the PC market has led to revenue declines and adjusted profits to tumble.

Given unfavorable analyst estimates, high valuation, and bleak profitability, investors could look to avoid the stock.

Stocks to Consider Instead of Advanced Micro Devices, Inc. (AMD)

AMD has an overall POWR Rating of D, equating to a Sell rating. One may instead want to consider these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) or B (Buy) rating: Infineon Technologies AG (IFNNY), SUMCO Corporation (SUOPY), and Broadcom Inc. (AVGO).

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AMD shares were trading at $116.36 per share on Tuesday morning, up $1.96 (+1.71%). Year-to-date, AMD has gained 79.65%, versus a 20.19% rise in the benchmark S&P 500 index during the same period.

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.

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