In October 2024, the stock price soared 60 times, but now it is far behind nvidia! How is AMD's performance looking?

In the US stock market, only the industry leader in a specific sector can grow into a giant company with a market cap of $200 billion. However, Nvidia is an exception. $Advanced Micro Devices (AMD.US)$ This chip company, whether in the CPU or GPU sector, can be said to be the second largest for years. This fact does not hinder its stock price from skyrocketing more than 60 times in less than ten years, surpassing the CPU industry leader Intel to become a member of the $200 billion club.

So, can AMD maintain such a rapid momentum of growth? We can find the answer from its financial performance. On October 29, AMD will release its latest financial results. Each release of financial results by the company may also imply a good trading or investment opportunity. Before that, investors need to understand how to interpret its financial performance.

For AMD's financial performance, we can focus on 4 indicators: datacenter revenue growth, CPU business market share changes, inventory pressure, and profitability.

1. Datacenter Revenue Growth

AMD's rapid stock price growth in recent years was mainly due to the rapid expansion of CPU-related businesses. However, in the past two years, the stock price reaching new highs has been largely driven by the datacenter business mainly focused on GPU shipments, riding the wave of AI explosion. Therefore, the revenue growth of the datacenter business is also a key focus for us based on the current trend.

We can focus on two points: the growth rate of the datacenter itself, and the proportion of the datacenter business in the total revenue. AMD currently has four business segments, including the datacenter business, client business mainly driven by CPU shipments, gaming business, and embedded business catering to enterprise customization chip demands.

Among them, the datacenter business started to be independently calculated for revenue in 2022Q2. Starting from 2022 Q2 to 2024 Q2, out of these four business segments of AMD, three are declining, with only the datacenter business maintaining growth.

During this period, the growth rate of AMD's data center business has experienced a process of slowing down and then re-accelerating growth, with its proportion of revenue expanding from 22.7% in 2022Q2 to 48.6% in 2024Q2, thereby replacing the client business to become AMD's largest revenue source.

In the subsequent performance, we can continue to observe whether AMD's data center revenue can continue to maintain high-speed growth and continue to expand its share in total revenue. After all, amidst the overall decline in other businesses, only the data center business continuing to carry the load can drive overall revenue growth.

The second point to focus on is the comparison of the growth rate of AMD's data center revenue with that of the industry leader, Nvidia, in data center revenue. We see that from 2022Q2 to 2022Q4, AMD's data center growth still outpaced Nvidia, but starting from 2023, AMD's data center growth performance began to be overtaken by Nvidia. During this period, Nvidia's data center business revenue grew more than 6 times compared to Q4 2022, while AMD only increased by 71% over the same period. The gap between the two widened from about twice in Q4 2022 to nearly 10 times in Q1 2024.

It can be said that in just over a year from Q1 2023 onwards, AMD's data center business was completely surpassed by Nvidia, despite AMD's stock price reaching new highs, the increase was far behind due to Nvidia. In the future, we can continue to observe the growth rate comparison of the data center business of both companies. If AMD can catch up, its stock price trend may see marginal improvement; otherwise, if Nvidia maintains its dominant position, AMD's stock price may face pressure.

2. Changes in CPU market share

CPU business was the starting point for AMD's development. AMD initially relied on Intel's X86 series processor authorization to quickly rise to the position of the second largest player in the CPU industry. Its CPU market share grew from less than two digits to over 30%, seriously threatening Intel's leading position.

Currently, AMD's four businesses are all related to CPU chips, which is crucial for AMD's foundation. AMD's rapid stock price appreciation since 2016 is also closely related to the swift expansion of its CPU market share. Therefore, changes in CPU market share are of significant importance for the stability of AMD's foundation and stock price trend.

Although the overall CPU industry is currently relatively weak compared to the explosive growth of GPUs, as long as market share is maintained and CPUs return to a rapid growth cycle, AMD's CPU-related business growth will naturally rise with the tide.

According to CPU Benchmark statistics, AMD's market share in the CPU market has increased steadily from 17.5% in Q3 2016 to 37.7% in Q3 2021, more than doubling its market share. The gap with Intel has rapidly narrowed during this time, marking the period when AMD's stock price rose the fastest.

Since Q4 2021 until now, AMD's CPU market share has stopped growing and even experienced a slight decline. Its stock price trend also lost momentum until leveraging the AI development wave in the past two years to reach new highs.

From Q3 2016 to the present, Intel's CPU market share has been significantly eroded overall, with stagnant revenue. During this period, its stock price increase has been unsatisfactory, at less than 50%, far below AMD's several times more growth during the same period.

In the future, we can continue to observe AMD's market share changes, to see if its market share can return to an upward trend after adjustments.

3. Inventory Pressure Situation

AMD's revenue mainly comes from CPU and GPU chips. Although the chip industry generally has strong growth attributes, it also exhibits obvious cyclical attributes. Considering its cyclic characteristics, inventory levels are a crucial indicator for measuring cyclical changes and growth expectations. When industry demand decreases and oversupply occurs, the company's inventory levels will rise, increasing sales pressure and subsequently affecting the stock price. On the contrary, when the cycle reverses and demand improves, the company's inventory levels will quickly decrease, and sales outlook will improve.

The appropriate measure of changes in inventory level is inventory/revenue ratio. The higher the ratio, the higher the inventory level, and the greater the sales pressure.

Due to weak chip industry demand, AMD's inventory/revenue indicators have been steadily rising since Q1 2022, soaring from around 40% to over 80%, resulting in a significant cut in its stock price in 2022.

In the 2023Q3-2023Q4 fiscal quarter, with the substantial growth of AMD's datacenter business and the rebound of client business, its sales pressure has eased, and the inventory/revenue indicators have consequently declined. However, in 2024Q1, this indicator significantly rose again, and continued at a high level of 85.5% in 2024Q2. In future performance, we can continue to observe the trend of AMD's inventory/revenue indicators to see if the previous improvement trend can be sustained.

4. Profitability

The cyclical changes in the chip industry are largely reflected in the company's profit-making ability. Therefore, AMD's profitability indicators are also one of the key focus areas in the market.

From a gross margin perspective, AMD's adjusted gross margin level stabilized and rebounded since a significant decline in 2022Q3, with a gross margin of about 53.1% in 2024Q2, reaching a new high in nearly 8 quarters, indicating a trend of cyclical recovery.

Looking at the net profit margin, AMD's adjusted net profit margin began to rise from 2023Q3 after bottoming out, currently stable at around 20%. In future performance, we can continue to observe whether AMD's gross margin can continue to improve and whether its net profit margin level can further enhance.

Having read this far, you may have some new insights on how to interpret AMD's performance. It is worth noting that each time a star company releases its performance, it may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors feel uncertain about the bullish or bearish direction of a company's performance, but the stock price may experience significant upward or downward volatility after the performance announcement, investors may consider capturing potential opportunities by trading the volatility of its stock price, considering employing a straddle strategy by purchasing both call and put options simultaneously.

In summary:

When it comes to AMD's performance, we should focus on the growth of its datacenter business, CPU market share, inventory pressure, and profitability.

AMD's datacenter business is the current growth engine. We can observe whether it can maintain high growth rates and narrow the growth gap with Nvidia.

After a rapid increase, AMD's CPU market share is currently stagnant. We can observe whether it can further expand its market share.

AMD's current inventory/revenue indicators are at a high level. We can observe if this indicator will decrease in future performance to reduce sales pressure.

In terms of AMD's profitability, the overall gross margin is on the rise, and the net profit margin has stopped falling and is rebounding. We can observe whether its profitability indicators can further improve.

Every time a company releases its earnings, it may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.