• 4Q23 revenue was within expectations. PATMI was above expectations due to higher tax benefits and interest income. FY23 revenue was at 99% of our FY23e forecasts, while PATMI was ~US$1bn above.
• Data Centre (DC) and Client (PC) segments continue to drive revenue growth, with YoY expansion of 38%/62%, respectively. FY24e revenue from MI300X DC GPUs was revised up from US$2bn to US$3.5bn on stronger customer demand and order book.
• We double our FY24e PATMI estimates to US$3.4bn due to expanding margins from higher contribution of DC products, while also rolling over an additional year of valuations. We expect overall revenue growth in the near term to be driven by robust AI-related demand, offset slightly by weak Gaming and Embedded segments. We upgrade to ACCUMULATE from NEUTRAL with a raised target price of US$195.00 (prev. US$110.00). Our WACC assumption of 7.4% remain unchanged, but we increase our terminal growth rate to 5% (prev. 4%) on higher AI demand.

The Positives

+ Turning more bullish on its Data Centre business. AMD saw positive DC growth (38% YoY) exiting FY23, setting quarterly and annual revenue records for its AI-related GPUs (MI300) and CPUs (4^th Gen EPYC), as demand from Cloud hyperscalers continued to accelerate. AMD also gained server CPU share (from Intel) in 4Q23. MI300X revenue tracked above AMD’s US$400mn guidance, with management raising FY24e MI300X revenue guidance from US$2bn to >US$3.5bn, citing stronger customer commitments from AI customers. AMD expects 1Q24e DC revenue to be flat QoQ, with ~10% decline in seasonality offset by a stronger GPU ramp.

+ Margin tailwinds moving into FY24. AMD is guiding 52% adj. gross margins in 1Q24e, a 120bps sequential increase vs 4Q23, as the company benefits from a larger mix of higher-margin DC products. We expect margins to improve sequentially across FY24e due to: 1) faster growth of DC products vs other products; 2) expected recovery of the Embedded segment in 2H24e; 3) working through its initial AI accelerator (Instinct) ramp.

The Negative

– Weak outlook for Gaming and Embedded to remain a drag. Management’s outlook for its Gaming and Embedded segments remained very weak, with most customers still working down their inventory levels. On a sequential basis, AMD expects Gaming revenue to decline >30% in 1Q24e due to excess component inventory of its Console customers, and with Embedded declining ~8-10%. This translates to a YoY decline in Embedded and a significant double-digit decline in Gaming. Gaming and Embedded contributed ~40% of total revenue in 4Q23.