AMD raises annual sales expectations for AI chips, but Q4 guidance is not good, falling more than 7% after hours | Financial Report Insights

On Tuesday, October 29th, after the US stock market closed, semiconductor giant AMD, striving to catch up with NVIDIA in the GPU field in data centers, released its financial report for the third quarter of the fiscal year 2024. Investors closely watched the annual sales guidance for its MI300 AI accelerator chip.

Although AMD's total revenue and most important data center revenue hit new highs in the third quarter, the midpoint of its revenue guidance for the fourth quarter was slightly below market expectations. Some analysts believe that supply chain constraints have prevented the company from meeting the huge demand for AI chips from customers.

The stock fell nearly 7% after hours, rose nearly 4% before the financial report was released on Tuesday, up nearly 13% year-to-date, while the Nasdaq rose nearly 25% during the same period. Competitors NVIDIA and Intel also saw slight declines after hours.

During the financial conference call at 5 pm Eastern Time, AMD's management raised its 2024 AI chip revenue forecast to over $5 billion, up from the previous forecast of $4.5 billion after the second quarter report. They mentioned that the upcoming MI accelerator products look promising, and they expect the AI accelerator market to reach an annual scale of $500 billion by 2028, but this did not change the stock's decline after hours.

1) Key Financial Data

Quarterly Revenue: $6.82 billion, a record high, up 18% year-over-year and 17% quarter-over-quarter. Market expectations were $6.71 billion, with the company guiding in the range of $6.4 billion to $7 billion.

Gross Margin: 50% under GAAP, up from 47% in the same period last year; 54% under non-GAAP, up from 51% in the same period last year.

Operating Profit: $724 million under GAAP, a significant increase of 223% year-over-year; $1.72 billion under non-GAAP, up 34% year-over-year and 36% quarter-over-quarter, showing a comprehensive acceleration from the previous quarter.

Net Profit: $771 million under GAAP, up 158% year-over-year; $1.5 billion under non-GAAP, up 33% year-over-year and 34% quarter-over-quarter, showing a comprehensive acceleration from the previous quarter.

Diluted EPS: $0.47 under GAAP, up 161% year-over-year; $0.92 under non-GAAP, up 31% year-over-year and 33% quarter-over-quarter, with market expectations at $0.92.

2) Outlook

Fourth Quarter Revenue: Expected to be in the range of $7.2 billion to $7.8 billion, with a midpoint of $7.5 billion, representing a year-over-year growth of about 22% and a quarter-over-quarter growth of about 10%. Analysts expect $7.55 billion.

Fourth Quarter Non-GAAP Gross Margin: Expected to be around 54%.

3) Segment Business Data

Data Center Division: Revenue reached a record high of $3.5 billion, up 122% year-over-year and 25% quarter-over-quarter, with market expectations at $3.52 billion

Client Computing Division: Revenue was $1.9 billion, up 29% year-on-year and 26% quarter-on-quarter.

Gaming Division: Revenue was $462 million, down 69% year-on-year and 29% quarter-on-quarter.

Embedded Division: Revenue was $927 million, down 25% year-on-year and up 8% quarter-on-quarter.

Highlights of Q3 Report: Data Center AI Revenue Doubled Year-on-Year for Two Consecutive Quarters, Setting a New High for Three Consecutive Quarters

In the second quarter of this year, AMD's data center division achieved record revenue for two consecutive quarters, reaching $2.8 billion, up 115% year-on-year and 21% quarter-on-quarter. In the third quarter, the revenue for this heavyweight business continued to hit record highs for three consecutive quarters, with an increasing growth rate throughout the year. In the first quarter, data center revenue increased by 80% year-on-year and 2% quarter-on-quarter.The company attributed this mainly to the strong growth in AMD Instinct GPU shipments and AMD EPYC CPU sales.The Client Computing Division, including personal computer processors, also performed well, mainly driven by demand for "Zen 5" AMD Ryzen processors. However, some analysts pointed out that the growth rate in the personal computer market was lower than some investors' expectations.The gaming department was mainly affected by the decline in semi-custom revenue, while the embedded department, including cheaper chips used for industrial and other applications, saw a sharp year-on-year decline in revenue due to customers normalizing inventory levels. The quarter-on-quarter revenue growth was due to improved demand in multiple end markets.AMD Chairman and CEO Lisa Su once again gave an optimistic assessment of the financial report, stating that the total revenue in the third quarter reached a new high, driven by the sales growth of EPYC and Instinct data center products, as well as strong demand for Ryzen PC processors:

"Looking ahead, we see significant growth opportunities in the data center, client, and embedded businesses, largely driven by the insatiable demand for more computing."The company's CFO emphasized the significant year-on-year increase in gross margin and earnings per share in the third quarter, stating:"With significant growth in the data center and client divisions, we are poised to achieve record annual revenue in 2024."

Analysis: Supply Chain Constraints Lead to Poor Q4 Revenue Guidance, Still Bullish on AMD's Market Share in the AI Accelerator Market

There are various interpretations for AMD's poor Q4 revenue guidance. The market is most concerned that it implies a slowdown in AI demand, but some analysts also point out that the health of AI demand is unquestionable, and AMD is mainly constrained by the supply chain's inability to meet the surge in orders for AI chipsTaiwan Semiconductor Manufacturing Company (TSMC), the world's largest chip foundry, warned in July that global AI chip production capacity will remain very tight until 2025, signaling significant obstacles for the supply of these advanced process semiconductors.

Earlier this month, AMD held the Advancing AI event and introduced the next generation of AI chips, but did not update the annual sales guidance for the current MI300 AI accelerator, nor did it announce more new major customer partnerships.

Northland Capital Markets released a bullish research report this week stating that AMD's market share in AI accelerator chips will continue to grow, especially as NVIDIA's strongest Blackwell product line faces manufacturing delays.

The institution expects AMD's market share to double within two years, with AI revenue reaching $18 billion to $28 billion by 2027, capturing up to 9.7% of the AI accelerator market. In 2023, the market share was less than 1% (specifically 0.7%). However, the report also stated:

"As AMD invests billions of dollars (in AI) to gain potential future annual revenue of hundreds of billions of dollars, slowing profit growth may be an issue for operating expenses."

According to AMD's financial report, capital expenditures in the third quarter were $132 million, up 6.5% year-on-year but down over 14% quarter-on-quarter. Capital expenditures for the first nine months of this year totaled $428 million, an increase of 5.2% year-on-year.