I believe that AMD (NASDAQ:AMD) recently provided lackluster guidance because of two issues that I’ve raised in the past: the company’s high reliance on China and its weakness in artificial intelligence or AI. As a result of these problems, I believe that AMD stock will continue to underperform the Nasdaq exchange in the coming months and quarters.
On June 2, AMD CFO Devinder Kumar stated that the company would meet its previous guidance of 21% year-over-year revenue growth. He also reiterated the company’s previous outlook of “approximately 25% top-line growth in 2020.”
That sounds pretty good. But Nvidia (NASDAQ:NVDA) provided Q2 revenue guidance that suggested its top line would surge nearly 30% YOY. And driven by the rapid expansion of data centers amid the work-from-home trend, two other chip makers — Micron (NASDAQ:MU) and Xilinx (NASDAQ:XLNX) – recently increased their revenue guidance for the current quarter.
Since AMD reiterated its guidance, AMD stock has lost nearly 3%, while the Nasdaq has climbed about 6%. Clearly, in the wake of AMD’s guidance reiteration, investors are no longer thrilled with the company’s stock.
So why isn’t AMD growing as quickly as Nvidia or raising its guidance like Micron and Xilinx?
I think the culprits are indeed China and AI. As I’ve reported previously, Goldman Sachs has estimated that China accounted for about 26% of AMD’s revenue in 2018.
AMD Stock and China
While conducting research for this column, I found a December 2019 TechCrunch article which stated that “China has reportedly ordered all foreign PC hardware and operating systems to be replaced in the next three years.”
According to the article, which cited a report in The Financial Times, China plans to eliminate 30% of foreign computers this year, 50% next year, and 20% in 2022. And ominously for AMD, the article added that ” The components and software must be Chinese as well, so Intel and AMD processors are out.”
If China is extending the prohibition to include server chips, 30% of the company’s revenue from China could be eliminated this year. Since AMD reportedly obtained 26% of its revenue from China in 2018, Beijing’s boycott could result in a sizable hit to AMD’s 2020 top line.
AMD Is Lagging in the Server Space
NextPlatform estimated that AMD’s total 2019 data center revenue came in at slightly less than $1 billion. By contrast, Nvidia generated $1.14 billion of data center revenue in just the first quarter of this year, while the Q1 revenue of Intel’s (NASDAQ:INTC) data center group came in at $7 billion.
The first-quarter revenue of AMD’s Enterprise, Embedded and Semi-Custom segment, which includes its EPYC server chips, sank 21% year-over-year to $348 million. The company, however, said that it had sold 300% more server chips than in the same period a year earlier.
AMD blamed the segment’s revenue decline on lower demand for its “custom chips used in game consoles.” Still, I think the tripling of the server chip unit sales, along with the decline of the segment’s overall revenue, indicates that the prices of the company’s server chips are meaningfully lower than those of its competitors.
Indeed, last September, Tom’s Hardware reported: “AMD’s server chips promise significantly lower price per core than Intel, while offering relatively similar performance per core.”
What may account for the price discrepancy, however, is AMD’s relative lack of proficiency in AI, which I’ve detailed multiple times in the past. As the AI gap between Intel and Nvidia on the one hand and AMD on the other grows, I believe that AMD has had to lower the prices of its server chips, negatively impacting its Q2 guidance.
Kumar, AMD’s CFO, predicted last month that the company’s data center business would generate “about 30% of AMD’s revenue over the next three to four years,” up from around 15% now. While the company could potentially hit that goal, I believe that it will have to sell its chips at quite low prices to get there.
The Bottom Line on AMD Stock
AMD’s growth is meaningfully lower than Nvidia’s. Further, unlike Micron and Xilinx, AMD failed to raise its top-line guidance for the current quarter.
I believe that China’s actions and the comparative weakness of AMD’s AI technologies are negatively impacting its results. With the company’s problems in these likely to only intensify going forward, I think that investors should avoid the shares.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he owned shares of Intel.