Chip slump bites AMD in the revenues

But how indicative are the AMD results of an overall slump in the market?
7 October 2022

AMD takes a hit – but what does it mean?

The waves of slumping revenues in the chipmaking sector – which not long ago surprised investors in Intel and Nvidia – have caught up with another leading manufacturer – Advanced Micro Devices Inc (AMD). The company posted third-quarter revenue estimates on Thursday that were around a billion dollars worse than had been forecast.

In a sign of potentially perverse thinking, when the same sort of impact hit Intel earlier in the year, there was much talk of the slump in that company’s projections being at least partially a result of its own misplaying of the production and marketing game. The surprising drop in AMD’s projections (which slammed its share prices down by a full 4% within a matter of hours, and also dragged the share prices of Nvidia and Intel down by more than 2%) is being taken as a genuine economic warning sign that the chip slump could actually be much worse than had previously been expected.

A weakened market

AMD had been hoping to post revenues of around $6.7 billion (give or take $200 million). Coming in with revenues of around $5.6 billion, while still a figure beyond the avarice of many companies, is a significant blow to the chipmaker. It also said that its non-GAAP gross margin is expected to come in at around 50%, rather than the significantly more healthy 54% it had been looking at.

AMD Chief Executive Office Lisa Su explained the figures in as panic-quashing a manner as possible. “The PC market weakened significantly in the quarter,” she said, then added that a combination of macroeconomic conditions had weakened PC demand in the third quarter of 2022.

Those macroeconomic conditions include a hurtling inflation spiral based partly, though not exclusively in the rise in fuel prices as a result of the resumption of Russian hostility in the wake of that country’s illegal invasion of Ukraine. The Covid pandemic and the Russian invasion of Ukraine have also exacerbated existing supply chain issues, that have made the whole chip industry taut and unable to expand as it would otherwise have done.

The slow shift back to a pre-pandemic model of work and schooling (with a new remote work component) has also led to less spending on PCs and devices than took place during the pandemic lockdowns, when connection to the outside world through video calling and conferencing technology (and the devices that enabled it) became a crucial first world necessity.

Measures to rebalance the chipmaking market

The Biden-Harris Administration has recently taken steps to begin redressing the overwhelming market supremacy of China in the chipmaking sector, through maneuvers like the CHIPs And Science Act, and several specifically anti-China moves like tying funding to domestic production, and requiring the eventual recipients of CHIPS funding to get special new licenses that certify their chips cannot be used in a military capacity by China or Russia.

But all of these measures are significantly too new to help AMD’s revenues in the short term – they’re meant to help reinvigorate American excellence in chipmaking in the much longer term.

While Intel and Nvidia were among the first US chip manufacturers to signal the slump in the market, the AMD figures are being used as a significant plot-point on the curve of the sector’s overall downward trend. They come in the wake of Micron Technology’s announcement last week that it was cutting its capex investments in fiscal 2023 by over 30%, to a total of $8 billion.

While there’s no sense in which AMD will be happy about the results, CEO Su was quick to remind the market that AMD remained a significant player, and that its data center, gaming, and embedded segments had all maintained the strong growth that had been expected of them. Roughly speaking, AMD’s client segment revenue was around $1 billion, down 40% year over year. Meanwhile, its gaming segment rose by 14% year over year to around $1.6 billion in revenue, and its data center business, the most conspicuous success, also generated about $1.6 billion in the third quarter of 2022, up 45% on this time in 2021. The boost in AMD’s embedded business, which hit around $1.3 billion this quarter, is thought to be largely attributable to its acquisition of Xilinx earlier in the year.

A singular sign of a general issue

The fact that these results are fairly healthy, coupled with the significant impacts on other chip manufacturers, means the results are largely being taken as a cyclical corrective, rather than a sign that AMD in particular is in trouble with its chipmaking.

That’s also underpinned by the Philadelphia Semiconductor Index. The Index tracks the prices of major silicon-producing and associated businesses, and it’s fallen by 36.4% so far in 2022, almost but not entirely negating its 41.2% overall rise in 2021.

If the AMD results are a signal of anything, it’s that those macroeconomic and socioeconomic factors of a tight supply chain, spiralling inflation and a post-pandemic consumer caution around new chip-centered device purchases are converging to deliver blow after blow to even the leading chipmakers in the Western world.