After two years of strong demand fueled by a pandemic, the computer market fell into ruin. Global unit shipments fell 19.5% year over year in the third quarter, with weakness in both the consumer and business markets. Supply chain constraints gave way to bloated inventories. On the consumer side, so many new computers have been purchased recently that there is little appetite for upgrades. On the business side, a troubled economy has probably led to some caution about spending.
Advanced Micro Devices (AMD -3.15%)the number 2 player in both the PC and server CPU markets behind Intel (INTC -2.20%), did not escape the pain. Delivering its preliminary third-quarter financials on October 6, AMD warned that its results would come in well below previous expectations. At the time, it kicked the can down the road on its Q4 outlook, saying it would be discussed on the third-quarter earnings call on Nov. 1.
Given the state of the PC market, Intel’s weak outlook and the fact that AMD’s new Ryzen desktop chips have a price problem, the end of the year will be rough for AMD.
Organic growth has already stopped
On the surface, AMD’s previous results may not seem so bad. The company cut its revenue from $6.7 billion to $5.6 billion, but that new figure still represents 29% growth year over year. There is one problem, however. That growth is entirely due to AMD’s acquisition of Xilinx. Go back on the Xilinx purchase, and its earnings will be roughly flat.
AMD expects sales in its consumer segment, which includes PC chips, to crash 40% year over year in the third quarter. That’s far worse than end-market demand as AMD’s customers cut inventories.
Its customers will eventually end up dropping their inventory levels, bringing AMD’s sales more in line with end-market demand. But even so, there isn’t much reason to believe that the PC market will rebound anytime soon. If AMD is going to grow, it will have to do so by gaining market share, and that will be more difficult than it has been in recent years.
Intel’s aggressive pricing
Intel cut its own full-year guidance when it reported results on October 27, and it announced plans for significant cost-cutting measures as it seeks to navigate the current storm. Intel’s consumer computing segment revenue fell 17% in the third quarter, and overall adjusted revenue will fall more than 25% in the fourth quarter.
This prospect does not bode well for AMD, especially since the prices of its latest Ryzen 7000 desktop CPUs are not very competitive. Intel’s Raptor Lake chips win when it comes to gaming, according to tech news and review site Tom’s Hardware, and they offer a much better price-to-performance ratio for multi-threaded workloads. “AMD will have to reduce prices of its Ryzen 7000 models now to stay competitive with Raptor Lake,” concluded Tom’s Hardware.
With the broader PC market in freefall, and with Intel’s Raptor Lake holding an edge in both the gaming and productivity parts of the market, AMD simply isn’t in a great position.
The data center market could be a silver lining
AMD still expects its data center segment to grow 45% year over year in the third quarter. Even if demand softens for server chips among enterprise and cloud customers, AMD has plenty of room to gain additional market share. Intel has faced delays in its effort to bring its Sapphire Rapids server chips to volume production, leaving its data center in a weakened state.
But just like in the PC market, Intel will not sit idly by as it loses market share. The company expects Sapphire Rapids to reach 1 million units faster than any Xeon server chip ever has, and Intel is likely to be quite aggressive as it tries to hit that goal. Gaining market share in the data center segment is likely to become more difficult for AMD as time goes on.
AMD will cut its full-year guidance when it reports its results. The only question is how much. And while the company isn’t likely to share many details about its expectations for 2023, the potential for a global recession and continued turmoil in the PC market represent some major headwinds. AMD enjoyed incredible growth and profits during the first two years of the pandemic. That chapter is almost certainly closed.
Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, short January 2023 $57.50 calls on Intel, and short January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.