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Morningstar | Minor Data Center Traction for AMD Is Nice, but Intel and Nvidia Won't Be Easy to Disrupt

AMD reported second-quarter results that modestly surpassed our expectations, while providing forward guidance consistent with our internal model. We applaud the firm’s efforts to stabilize its business, with recent CPU (Ryzen) and GPU (Radeon) products bearing fruit. Meanwhile, blockchain demand cooled, causing graphics revenue to fall sequentially, as we had expected. AMD’s GPU sales to cloud customers rose significantly, albeit off a low base, as cloud vendors likely appreciate another formidable player to challenge Nvidia for GPU supremacy. Shares rose nearly 6% during afterhours trading and are at a sizable premium to our unchanged fair value estimate of $9 per share. Despite positive traction in recent quarters, we remain concerned that AMD will find it challenging to drive meaningful revenue growth beyond 2018 without succumbing to pricing pressures as it seeks to volley with chip Titans such as Intel and Nvidia.

Second-quarter revenue was $1.76 billion, up 53% year over year and 7% sequentially. Computing and graphics revenue drove the majority of the increase, rising 64% year over year to $1.09 billion, driven by higher sales from Radeon GPU and Ryzen CPU products. Ryzen accounted for roughly 60% of CPU sales, bolstering AMD’s margins. Meanwhile, Radeon GPU growth was driven by gaming and cryptocurrency demand, with the latter accounting for 6% of revenue during the quarter (down from 10% the prior quarter). This level of revenue contribution may be underestimating the true impact of cryptocurrency mining on AMD’s results, and illustrates the challenges in determining how GPUs are utilized by the end user. Consequently, we are exercising caution when trying to extrapolate recent strength in the computing and graphics segment.

Enterprise, embedded, and semicustom revenue was $670 million, up 37% year over year with higher semicustom and EPYC server chip sales. This segment is still dominated by chips supporting Microsoft and Sony game consoles. AMD is set to pursue Intel’s dominant server CPU market share, and we think modest single-digit share is quite achievable, though Intel will likely continue to reap the lion’s share of profits. Management expects third-quarter revenue to be up 7% year over year at $1.7 billion, with higher Ryzen and EPYC sales offset by lower GPU revenue.