AMD: AI is trapped in a dilemma again.

AMD (AMD.O) released its Q4 2024 financial report (ending December 2024) after U.S. stock market hours on February 5, 2025, Beijing time. The key points are as follows:

1. Overall Performance: Core Operating Profit Continues to Improve. AMD achieved revenue of $7.658 billion in Q4 2024, a year-on-year increase of 24.2%, which is basically in line with market expectations ($7.528 billion). The quarterly revenue growth was mainly driven by the client and data center businesses. AMD reported a net profit of $482 million in Q4 2024, mainly affected by acquisition costs and tax expenses. From an operational perspective, the company's operating net profit for the quarter was $1.378 billion, with the core operating profit margin rising to 18%.

2. Business Segment Analysis: Client Business Gains Market Share, Data Center Faces Concerns. $AMD(AMD.US) With growth in both data center and client businesses, the combined revenue from these two segments accounted for 80% of total revenue.

1) Client Business Gains Market Share: Revenue for this segment grew to $2.313 billion, a year-on-year increase of 58.3%. Amid a slow recovery in the PC market, the company's client business achieved high growth, mainly due to an increase in market share.

2) Data Center Faces Concerns: Revenue for this segment was $3.859 billion, a quarter-on-quarter increase of 8.7%. The growth in the data center business was primarily due to increased shipments of related products (GPU and CPU), driven by capital expenditures from core cloud providers. However, the emergence of Deepseek and ASICs may impact the company's data center business.

3. AMD Performance Guidance: For Q1 2025, expected revenue is $6.8-7.4 billion (market expectation: $7.05 billion), a quarter-on-quarter decline (3.4%-11.2%). The company expects a non-GAAP gross margin of around 54% (market expectation: 54%). Both core guidance figures are basically in line with market expectations.

Overall View of Dolphin: AMD's Financial Report is Not Ideal.

The company's revenue for the quarter grew as expected, mainly driven by growth in the data center and client businesses. With a slight increase in gross margin and a decrease in expense ratio, the company's core operating profit continued to rebound.

In terms of segmented business, the company's current main core businesses are the data center and client businesses:

1) Client Business: This was the main outperformer this quarter, mainly benefiting from the company's CPU gaining higher market share in the PC market. According to industry data, AMD's market share in the desktop market has caught up with Intel, with a trend of further overtaking.Although the PC industry is currently in a slow recovery phase, the company's market share in the PC sector has been steadily increasing, which is expected to continue driving business growth;

2) Data Center Business: This is the most closely watched area of the market, but this quarter it fell short of expectations. In terms of quarter-on-quarter incremental growth, the first two quarters were $500 million and $700 million, while this quarter only grew by $300 million, showing a significant slowdown in growth. Additionally, based on the company's guidance for the next quarter, it is possible that the data center business may experience a decline.

Considering the current market situation, there are already some negative factors at play: ① The emergence of Deepseek may impact the capital expenditures of major cloud service providers; ② Custom ASIC chips may also erode the market share of computing power chips. Under this dual impact, the company's guidance for the next quarter is also "tepid," with a noticeable decline quarter-on-quarter, which will amplify market concerns.

Furthermore, the acquisition of ZT Systems by the company is expected to be completed in the first half of 2025, which will also have a certain dilutive effect on the company's performance. Overall, although the company is gradually gaining an advantage in client-side business, the pressure on the data center business remains significant. AMD itself is only the second choice for GPUs in the market, and any decline in overall capital expenditures or an increase in custom ASIC production will directly impact the company's performance. If the company cannot provide a strong response, it will only further lose market confidence.

Here is Dolphin's specific analysis of AMD's financial report:

1. Overall Performance: Core Operating Profit Continues to Improve

1.1 Revenue Side

AMD achieved revenue of $7.658 billion in the fourth quarter of 2024, a year-on-year increase of 24.2%, which is basically in line with market expectations ($7.53 billion). Although the company's gaming and embedded businesses still saw a decline this quarter, the growth performance of the data center and client-side businesses drove the overall revenue increase for the company .

1.2 Gross Profit Side

AMD achieved a gross profit of $3.882 billion in the fourth quarter of 2024, an increase of 33.4% year-on-year. The growth rate of gross profit exceeded that of revenue, mainly due to the improvement in gross profit margin.

AMD's gross profit margin for this quarter was 50.7%, an increase of 3.5 percentage points year-on-year, but lower than market expectations (52.4%). The gross profit margin saw a slight increase quarter-on-quarter, mainly due to adjustments in the business structure. Currently, the proportion of the company's data center and client-side businesses has increased, thereby driving the recovery of the gross profit margin.

1.3 Operating Expenses

AMD's operating expenses in the fourth quarter of 2024 were $2.504 billion, an increase of 16.2% year-on-year. Operating expenses continued to rise quarter-on-quarter, but due to the growth rate being lower than revenue growth, the operating expense ratio continued to decline. In this quarter, operating expenses also included an additional $186 million in restructuring-related costs.

Breaking down the specific expenses:

1) R&D Expenses: The company's R&D expenses for this quarter were $1.712 billion, an increase of 13.3% year-on-year. R&D expenses have consistently shown an upward trend. As a technology company, the company continues to emphasize R&D. Additionally, due to revenue growth, the R&D expense ratio for this quarter continued to decline to 22.4%, remaining within a relatively reasonable range;

2) Sales and Management Expenses: The company's sales and management expenses for this quarter were $792 million, an increase of 23% year-on-year. The expense situation on the sales side is highly correlated with revenue growth, and the growth rates of the two items were relatively close this quarter.

1.4 Net Profit

AMD achieved a net profit of $482 million in the fourth quarter of 2024, with a net profit margin of 6.3%, which has declined again.

Due to AMD's ongoing acquisition of Xilinx resulting in significant deferred expenses, this will erode profits for some time in the future. Regarding the actual operating conditions for this quarter, Dolphin believes that "core operating profit" is more relevant.

Core Operating Profit = Gross Profit - Total Core Operating Expenses

After excluding the impact of acquisition expenses, Dolphin estimates that AMD's core operating profit for this quarter was $1.378 billion, a quarter-on-quarter increase of 29.8%.

The growth in the company's operational performance this quarter was mainly driven by the growth of the data center and client businesses. Additionally, the gross profit margin slightly improved, and the related core expense ratio declined, ultimately leading to continued growth in the company's operational profits.

II. Business Segmentation: Client Business Gains Market Share, Data Center Faces Hidden Concerns

From the company's business segmentation, the data center and client businesses are currently the core businesses, accounting for 80% of the total. With the growth in AI demand, the proportion of the data center business has risen to 50%, playing a crucial role in the company's performance.

2.1 Data Center Business

AMD's data center business achieved revenue of $3.859 billion in the fourth quarter of 2024, an increase of 69.1% year-on-year, but below market expectations ($4.09 billion). This quarter's growth was driven by sales of AMD Instinct GPUs and the fourth and fifth generation AMD EPYC CPUsCore CPU and GPU Products of the Company: 1) Among cloud service providers, AMD EPYC processors have surpassed a 50% market share, with a significant increase in adoption among enterprise customers; 2) AMD Instinct GPUs have been adopted by over 12 cloud service providers globally, and this number is expected to continue growing by 2025.

Regarding the progress of the MI series products that the market is concerned about:

MI325x: Mass production began in the fourth quarter of 2024, with more customers expected to adopt it in the first half of 2025.

MI350 Series: Originally planned for release in the second half of 2025, but due to excellent product performance and strong customer demand, mass production has been advanced to mid-2025. The MI350 series is expected to bring significant performance improvements and market competitiveness.

MI400 Series: Currently under development, expected to launch in 2026, will support large-scale data center-level solutions.

Although AMD's MI350 product mass production has been advanced, this positive news is not enough to alleviate market concerns: ① The popularity of Deepseek may impact the capital expenditures of major cloud service providers; ② Some major companies have begun customizing ASIC chips, creating a certain competitive relationship with the GPU market. The former will affect the overall market size, while the latter will influence the distribution of market share. However, the company's latest financial report did not provide a strong response, which may further erode market confidence.

2.2 Client Business

AMD's client business achieved revenue of $2.313 billion in the fourth quarter of 2024, a year-on-year increase of 58.3%, significantly better than the market expectation of $1.986 billion. The growth in the client segment is mainly attributed to the increase in sales of the fifth-generation Ryzen CPUs.

According to industry data, global PC shipments in the fourth quarter of 2024 reached 69.3 million units, a year-on-year increase of 3.4%. Meanwhile, AMD's client business achieved a nearly 58.3% year-on-year growth. In contrast, Intel's client business declined by 9.4% year-on-year. In a slightly growing overall market, Dolphin believes that AMD gained a larger market share in the PC market this quarter.

AMD's share in both the desktop and laptop markets is increasing. Although Intel still leads in the laptop market, AMD's share in the desktop market has caught up with Intel this quarter, with the potential for further overtaking.The company expects the PC market to grow by about 5% year-on-year in 2025, while AMD is expected to achieve excess growth performance by enhancing its market share through product capabilities.

2.3 Gaming Business

AMD's gaming business achieved revenue of $563 million in the fourth quarter of 2024, a year-on-year decline of 58.3%, better than market expectations ($487 million). Semi-custom sales declined due to Microsoft and Sony reducing channel inventory, and it is expected to return to normal in 2025. The gaming graphics card business is accelerating inventory clearance ahead of the launch of the next-generation products, with RDNA 4 architecture products set to enhance performance.

The quarter-on-quarter rebound in the company's gaming business was mainly driven by Sony's launch of the PlayStation 5 Pro, for which AMD provided semi-custom SoCs. However, the gaming graphics card business is still in the inventory clearance phase, with no significant improvement.

2.4 Embedded Business

AMD's embedded business achieved revenue of $923 million in the fourth quarter of 2024, a year-on-year decline of 12.7%, slightly below market expectations ($959 million). The company's embedded business is primarily based on the previously acquired Xilinx, and overall terminal demand remains sluggish. However, the company has expanded its adaptive computing product portfolio, supporting the revenue performance of the embedded business.