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Morningstar | New Product Ramps Fail to Insulate AMD From Excess GPU Channel Inventories; No Change to $11 FVE. See Updated Analyst Note from 30 Jan 2019

AMD reported fourth-quarter results slightly below our expectations due to lower GPU sales stemming from post-cryptocurrency boom excess channel inventories that have also plagued Nvidia (which lowered its revenue guidance Jan. 28). On a positive note, about 65% of AMD’s sales during the quarter came from new products, including Ryzen PC CPUs, EPYC server CPUs, and Radeon data center GPUs. Shares rose 9% during after-hours trading as the firm recorded its highest client computing sales in more than four years, gained client CPU unit share for the fifth consecutive quarter, and achieved mid-single-digit server unit share exiting 2018. Despite this forward momentum, management expects 2019 sales to be up in the high single digits, as headwinds in the graphics channel and macroeconomic uncertainties offset the firm’s 7-nanometer product ramps. We are maintaining our $11 fair value estimate for no-moat AMD; we think the firm remains overvalued as we view the share gains implied by current levels as overly aggressive.

For 2018, revenue grew 23%, led by strong computing and graphics segment growth. During the fourth quarter, sales rose 6% year over year to $1.42 billion thanks to strong sales of Ryzen CPUs and data center GPUs, partially offset by weaker gaming GPUs. Enterprise, embedded, and semicustom segment sales for the quarter were flat year over year at $433 million due to seasonally lower semi custom sales for game consoles offset by strong EPYC server chip sales. Gross margins were 37.8% during the quarter, up 400 basis points year over year due to a stronger product mix featuring new products. Management expects first-quarter sales to be $1.25 billion, which implies a 12% sequential decline caused by continued graphics weakness, partially offset by Ryzen, EPYC, and Radeon data center GPU strength.

While the company will ramp 7-nm products throughout the year and is poised to gain share from Intel and Nvidia, we expect the latter two to maintain the lion’s share of the high end of the CPU and GPU spectrums, respectively.

For more insight into our thoughts on Intel's efforts in the data center and AMD's competitiveness, please see our report, "Concerns Over the Demise of Intel's Data Center Leadership Are Overdone."