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With a market capitalization of roughly $230 billion, Advanced Micro Devices (AMD) has consistently positioned itself as a formidable competitor to chip giants such as Nvidia (NVDA) and Intel (INTC). AMD is well-known for its innovative products, which include CPUs, GPUs, and custom chips for gaming consoles.
With the artificial intelligence (AI) revolution, semiconductor companies have seen tremendous growth because their high-quality processors can handle AI's computational demands.
Over the years, AMD has capitalized on its innovative edge, particularly in CPUs with its Ryzen series and GPUs with the Radeon line. AMD stock has soared an impressive 243.5% in the last five years.
AMD stock’s performance has been average this year, with the stock down 5% year-to-date as of Dec. 6, trailing the tech-heavy NASDAQ Composite Index's ($NASX) gain of 33.4%. Nonetheless, Wall Street predicts a significant increase in the stock price over the next year. Is it time to load up on this AI stock?
AMD’s Market Position Is Strengthening
AMD's Ryzen series has been a game changer, providing competitive performance to Intel processors. Ryzen's success has helped AMD expand its presence in the desktop, laptop, and server markets. Its Radeon graphics cards are commonly used in gaming, professional visualization, and data centers.
The company operates through four segments. The Data Center segment is the largest revenue generator, with revenue up 122% in the most recent third quarter to $3.5 billion. The Client segment's revenue increased by 29%, reaching $1.9 billion. However, revenue in the Gaming and Embedded segments fell by 69% and 25%, respectively. Total revenue increased 18% to $6.8 billion, with adjusted earnings per share rising 161% to $0.47.
According to management, data center and client processor sales compensated for the decline in the other two segments. During the quarter, the company completed the acquisition of Silo AI, a private AI lab valued at $665 million, which it expects to help accelerate the development and deployment of AI models for AMD hardware.
It also announced plans to acquire ZT Systems, a provider of hyperscale AI systems, for $4.9 billion in cash and stock. This acquisition will strengthen the company's Data Center segment.
Despite these strategic investments, AMD maintained a strong balance sheet, ending the quarter with around $4.5 billion in cash, cash equivalents, and short-term investments, compared with $1.7 billion in debt. AMD has taken a cautious approach to debt, with a debt-to-equity ratio of 0.03x, significantly lower than industry averages. Its strong free cash flow generation also allows for ongoing investments in R&D and potential strategic acquisitions. In the third quarter, it generated $496 million in free cash flow.
During the quarter, the company expanded its embedded portfolio with new EPYC Embedded 8004 Series processors, the cost-optimized Alveo UL3422 Accelerator Card, and Artix UltraScale+ XA AU7P. These products may help the company see some recovery in the Embedded segment in the coming quarters.
AMD has strong partnerships with Dell (DELL), Meta Platforms (META), Microsoft (MSFT), Oracle (ORCL), Google (GOOGL), and Super Micro Computer (SMCI), among others. During the Q3 earnings call, management emphasized that “Meta alone has deployed more than 1.5 million EPYC CPUs across their global data center fleet to power their social media platforms.“
Looking Ahead
The Data Center segment may continue to grow rapidly as the company ramps up fifth-generation EPYC processors. Management stated, “We have built significant momentum across our data center AI business with deployments increasing across an expanding set of cloud, enterprise, and AI customers.” The company expects Data Center GPU revenue to be more than $5 billion in 2024.
AMD expects total revenue in the fourth quarter to be around $7.5 billion (plus or minus $300 million), representing an average year-over-year growth of 22%. The company did not provide any guidance for the full year.
However, analysts covering AMD predict that revenue and earnings will grow by 13.1% and 25.5%, respectively, in 2024. Revenue and earnings are expected to grow by 26.9% and 53.8% in 2025, respectively. AMD is trading at 28 times forward 2025 earnings, lower than its five-year historical average P/E of 75x. AMD stock is still a reasonable pick now given its long-term AI potential.
What Does Wall Street Say About AMD Stock?
Following AMD's third-quarter results, Phillip Securities analyst Jonathan Woo maintained a "Hold" rating on the stock with a $170 price target. Woo believes that, despite weak performance in the Gaming and Embedded segments, the company's overall potential remains strong due to strategic advances in AI and the PC market.
Overall, Wall Street is strongly bullish about AMD stock, given the company’s continued innovation and expansion into high-growth markets like AI and data centers.
Out of the 38 analysts that cover AMD, 31 rate it a “Strong Buy,” while one recommends a “Moderate Buy,” and six suggest a “Hold.”
Based on analysts' average price target of $190.06, Wall Street sees potential upside of about 34.4% over the next 12 months. Furthermore, its high target sits at $250, indicating confidence in the company's growth trajectory and a potential price increase of 73.6% from current levels.
The Bottom Line on AMD Stock
AMD has undergone a remarkable transformation over the last decade thanks to AI, taking it from a struggling chipmaker to a dominant player in the semiconductor industry. Its strong financial performance, innovative product portfolio, expanding market share, and strategic partnerships position it as an appealing investment choice for long-term investors with high risk tolerance.
