The stock market had a rough year in 2022, but the technology sector bore the brunt of the pessimism, with the Nasdaq-100 index falling by 33%. Some areas, however, fared worse than others.
The semiconductor industry is a good example.
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The pandemic triggered chip shortages across the world in 2020 and 2021, which gave manufacturers pricing power and drove monumental growth. But as the economy cooled in 2022, production caught up and the industry was left with too much supply, leading to far weaker conditions.
Advanced Micro Devices (NASDAQ: AMD) stock plunged by 55% for the year as a result, substantially underperforming the Nasdaq-100. But 2023 could be much brighter as inventories stabilize and innovation continues to drive new use cases in consumer electronics, cars, and the data center.
AMD is a leading chip producer globally and since its stock remains down 47% from its all-time high, it might be time for investors to take advantage by buying in.
AMD had a mixed year in 2022
The economy was the greatest challenge for many businesses last year. Inflation soared to a 40-year high in June, which prompted the U.S. Federal Reserve to increase interest rates at the fastest pace in history. Naturally, consumers felt the pain and began to cut back on big-ticket purchases like new computers or even the latest game consoles.
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That had a direct impact on AMD’s revenue because it’s a leading supplier of PC chips, as well as chips for both Sony‘s PlayStation 5 and Microsoft‘s Xbox gaming consoles. Furthermore, AMD hardware can be found inside the infotainment systems in Tesla‘s line of electric vehicles, and that company recently began slashing prices to reignite sluggish sales.
But one area that remained incredibly strong was the data center. Businesses continued to shift their operations online using cloud technology because it not only drives growth, but it’s also a major cost saver. AMD produces semiconductors for all of the major providers of cloud services, from Amazon Web Services to Alphabet‘s Google Cloud. Put simply, in the digital gold rush, AMD is selling the shovels.
AMD’s data center segment generated $6 billion in revenue in 2022, up 64% compared to 2021. It grew 3 times faster than the gaming segment, which is the company’s largest, with $6.8 billion in sales. But given that disparity, the data center could take over as its main revenue driver in 2023.
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Xilinx had a major impact on AMD’s results in 2022
AMD acquired Xilinx in 2022 for $49 billion. It’s the leader in adaptive computing, which AMD believes could drive the next decade (or more) of innovation and growth.
To upgrade semiconductor hardware, the end user typically has to wait for the next version of the chip and swap it out entirely for the new model. Adaptive technology, however, can be reconfigured after the manufacturing process, and adjusts to the user’s needs in real time.
That can significantly shorten the upgrade cycle, something that’s key for emerging technologies like artificial intelligence (AI), which is often constrained because hardware advancements aren’t keeping pace with the software side.
Xilinx brings AMD into a host of new industries including automotive, healthcare, industrial, communications, and aerospace and defense. These sectors are demanding the increased computing capabilities that adaptive technology provides and, as a result, drove AMD’s embedded segment to $4.5 billion in revenue in 2022. That was a 1,750% increase compared to 2021, albeit on a mostly irrelevant comparable number (Xilinx didn’t join AMD until 2022).
2023 estimates might be too low, which presents an opportunity for investors
AMD’s total revenue for 2022 came in at $23.6 billion, up 44% year over year. But Wall Street analysts are betting that growth rate will shrink to just 4% in 2023, with the company set to bring in $24.7 billion in revenue. That might be too pessimistic, though.
As touched on earlier, personal computing was a drag on AMD in 2022 as consumers cut back on spending. Client-segment revenue shrank 10% for the year, and a whopping 51% in Q4. But CEO Lisa Su thinks this area of the business will bottom in the first quarter of 2023, so a turnaround could really juice the company’s overall results for the year.
Combine that with the red-hot data center segment and the contribution of Xilinx, analysts’ revenue estimates for this year might be way too low.
Here’s why that’s an opportunity for investors. AMD delivered $3.50 in earnings per share in 2022 on a non-GAAP basis, which strips out one-off costs related to acquisitions, as well as stock-based compensation. Therefore, AMD stock trades at a price to earnings (P/E) ratio of 23.2, which is actually 11.7% cheaper than the 26.3 P/E ratio of the Nasdaq-100 index.
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So, not only is AMD stock trading at a 47% discount to its all-time high, it’s also trading at a nice discount to its peers in the rest of the technology sector. Given the company’s performance and its long-term potential, this is a dip you might regret not buying as time goes on.
