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Tech stocks have rallied this year amid rising optimism around artificial intelligence (AI), despite macroeconomic headwinds. Semiconductor chip stocks, in particular, are benefiting from the AI hype. While the market adores the chip leader Nvidia (NVDA), there are AI chip stocks with bright prospects as the AI era unfolds.
Valued at $164.49 billion, Advanced Micro Devices (AMD), popularly known as AMD, has been a major player in the semiconductor industry over the last five decades. AMD has surged 300% in the last five years and an astounding 3,120% in the last decade.
More recently, AMD shares are up 56% year to date, outperforming the 24% gain in the tech-heavy Nasdaq Composite ($NASX). Plus, Wall Street believes AMD is well-positioned to capitalize on opportunities in the AI market in the coming years, despite the intense competition.
AMD Strengthens Its Fundamentals
Advanced Micro Devices earnings surpassed analysts’ earnings estimates in each of the last two quarters, despite a slowdown in its data center’s business during the first half of 2023. Data segment revenue in Q2 fell 11% year-over-year to $1.3 billion. However, it grew 2% sequentially due to the accelerated adoption of the 4th Gen EPYC CPU and rising cloud market demand. Notably, net revenues for Q2 came in at $5.36 billion, down from $6.5 billion in the year-ago quarter.
AMD ended the quarter with $6.3 billion in cash, cash equivalents, and marketable securities while reducing total debt from $2.5 billion at the end of Q1 to $1.7 billion. It also had $254 million in free cash flow.
CEO Lisa Su stated in the Q2 earnings call that the company launched 30 new AMD instances, with multiple Genoa instances announced by Amazon's (AMZN) Amazon Web Services (AWS), Alibaba (BABA), Microsoft’s (MSFT) Azure, and Oracle (ORCL).
Looking ahead, AMD anticipates a double-digit percentage increase sequentially in Data Center and Client segment revenues, fueled by rising demand for EPYC and Ryzen processors. Overall, EPYC revenue could rise by a double-digit percentage in Q3, owing to a ramp-up in demand for 4th Gen EPYC CPUs. Furthermore, the company emphasized how the AI accelerator market could reach roughly $150 billion by 2027.
Management believes that though the AI era is just getting started, it is a “multibillion-dollar growth opportunity for AMD across cloud, edge, and an increasingly diverse number of intelligent endpoints,” according to Su.
Raising the Stakes in the AI Race
Graphics processing units (GPUs) are at the forefront of AI acceleration. Nvidia has been a market leader in the chip market, and is likely to maintain its position. AMD, on the other hand, is not short on effort. As AI advances, there will be an increased demand for efficient and scalable AI computing solutions, which AMD is committed to providing.
Even Microsoft’s chief technology officer, Kevin Scott, believes AMD’s GPU offerings could be highly critical in the coming years.
Recently, AMD raised the stakes beyond its data center segment with the announcement of a major acquisition. It signed a definitive agreement to acquire Nod.ai to expand its open AI software capabilities into its hardware. Regarding AMD’s goal with this acquisition, management stated, “The addition of the talented Nod.ai team accelerates our ability to advance open-source compiler technology and enable portable, high-performance AI solutions across the AMD product portfolio.”
Management also expects more opportunities in generative AI, as they see rising customer interest in its MI300A and MI300X GPUs. The MI300 accelerators, designed to be a competitive alternative for Nvidia's A100 and H100 GPUs, will be launched in Q4 2023. Comparatively, Nvidia expects growing demand for its H100 chips, forecasting revenue of around $16 billion in its Q3 fiscal 2024.
Furthermore, on Oct. 19, AMD announced the launch of a few AI-powered high-end processors - namely, the Ryzen Threadripper PRO 7000 WX-Series processors and the newly re-introduced Ryzen Threadripper 7000 Series processors, which it claims to be the “world’s fastest desktop processor.”
What Are Analysts Saying About AMD?
Baird Equity Research just lowered its 2024 revenue estimates for AMD, citing concerns over the company’s data center business. The analysts were skeptical of AMD’s decision to accelerate its MI300 chip launch in the fourth quarter, noting AMD’s “lack of design wins outside of supercomputing applications so far and [...] the absence of a well-established software ecosystem." Baird also lowered the target price for AMD to $125 from $170.
Notably, rising U.S.-China tensions could be a drag on chipmakers like AMD. Nonetheless, most of Wall Street remains highly bullish on AMD’s stock potential amid fast-paced growth in the AI niche.
For the third quarter, analysts predict revenue of $5.7 billion and earnings per share of $0.49. AMD will report its Q3 earnings on Oct. 31.
From $23.6 billion in revenue in fiscal 2022, analysts expect Advanced Micro Devices’ revenue to dip by 3.3% to $22.8 billion in fiscal 2023. But analysts predict revenue to grow to $27.3 billion by fiscal 2024. Compared to EPS of $0.84 in fiscal 2022, analysts foresee EPS increasing to $2.01 in fiscal 2023 and $3.22 in fiscal 2024. AMD trades at 24 times forward earnings. Based on 2024 growth forecasts, the stock seems fairly valued.
At present, out of the 28 analysts covering AMD, 21 have a “strong buy” recommendation, one suggests a “moderate buy,” and six call it a “hold.” The stock has no sell recommendations.
Based on analysts' average price target of $139, Wall Street sees a potential upside of about 37% in the next 12 months. The highest target price stands at $200, and the lowest is $80 for AMD.
The Bottom Line on AMD
All in all, Advanced Micro Devices is poised to take advantage of the recovering Data Center market and the strengthening prospects of AI over the coming years. With a robust line-up of innovative products, AMD is well-positioned to continue influencing the future of computing.
While the current rally in AI stocks is appealing, investors should be wary of the risks, as the tech sector is vulnerable to macroeconomic headwinds. A portfolio of top AI stocks - such as AMD - balanced with some stable stocks is a wise long-term investment strategy now.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
