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Shares of semiconductor giant Advanced Micro Devices (AMD) have underperformed the broader markets by a wide margin. AMD stock is up about 7.5% year-to-date, compared to a roughly 22% gain in the S&P 500 Index ($SPX). However, as AMD gears up to release its third quarter (Q3) earnings this week, let’s explore whether a solid quarterly report could revitalize its share price.
AMD: Q3 Expectations
AMD will announce its Q3 2024 financial results after the close this Tuesday, Oct. 29. The company has seen solid growth in its data center and client computing segments, which are expected to drive revenue and earnings growth in Q3. However, challenges in AMD’s gaming segment may offset some of these gains.
Management has projected revenue of around $6.7 billion for the third quarter — a 16% increase year over year, and a 15% rise from the previous quarter. A steep ramp of AMD Instinct processors and strong server and client revenue growth will likely more than offset the declines in the gaming and embedded segments.
One of the biggest drivers of AMD’s performance has been its data center division, which now accounts for about 50% of its total sales. With demand for data center solutions skyrocketing, this growth is expected to make a meaningful impact on AMD’s bottom line.
Analysts are projecting AMD’s Q3 earnings per share (EPS) to be $0.92, reflecting an impressive 31% year-over-year increase.
Data Center Growth Leads the Way
AMD’s data center segment revenue increased 115% year-over-year in Q2 to a record $2.8 billion, driven by the higher shipment of its Instinct MI300 GPU and a solid double-digit percentage increase in EPYC CPU sales.
This momentum is expected to carry over into Q3, with increased cloud adoption driving demand for AMD’s fourth-gen EPYC CPUs, especially among hyperscale clients seeking to support internal and public cloud workloads.
Additionally, strong enterprise demand will enable AMD to close multiple large deals in Q3, as well. The company is attracting new clients while expanding its relationships with existing ones, which supports long-term growth.
In the AI space, AMD's data center GPU revenue has hit records for three consecutive quarters, with MI300 GPU sales exceeding $1 billion in Q2 alone. This strength will likely sustain in Q3. AMD is actively expanding its AI customer pipeline and collaborating with cloud partners to ramp up the availability of the MI300 series, meeting rising demand for high-performance AI solutions. On the software side, AMD has enhanced its stack to simplify AI deployment on its platforms.
With growing momentum, AMD has raised its 2024 data center GPU revenue outlook to over $4.5 billion, up from a prior $4 billion—a figure that may be revised even higher during its Q3 earnings call.
Momentum in Client Segment to Continue
AMD's client segment has experienced impressive growth, with Q2 revenue reaching $1.5 billion — a significant 49% jump compared to last year. This upward trend is expected to carry into Q3, driven by strong demand for AMD’s earlier Ryzen processors and its new, cutting-edge Zen 5 processors.
AMD’s latest Ryzen 9000 series processors are designed to boost performance and are compatible with existing AM5 motherboards, offering a convenient upgrade path for dedicated AMD users. In the notebook market, AMD's Ryzen AI 300 series is anticipated to capture additional market share, supported by design wins.
Challenges Linger in the Gaming Segment
AMD’s gaming segment has faced headwinds. Revenue fell 59% year-over-year to $648 million in Q2 due to a decline in sales of semi-custom SoCs. AMD expects continued softness in semi-custom demand, with sales likely to weaken further in the latter half of the year.
However, it’s not all bad news in gaming. Sales of AMD’s Radeon 6000 and 7000 series GPUs improved year-over-year during the second quarter, highlighting solid channel performance.
Nevertheless, overall weak demand remains a challenge for the segment’s revenue and profitability, suggesting a tempered outlook for AMD’s gaming division as it navigates this tougher market environment.
The Takeaway on AMD Ahead of Earnings
AMD is accelerating and expanding its AI offerings, and is well-positioned to take advantage of the increasing demand for data center infrastructure. This surge in demand is expected to lead to faster sales growth for its chips. Additionally, AMD’s recent acquisitions enhance its software capabilities, which bode well for future growth. However, challenges in the gaming segment may pose a temporary setback.
Despite this short-term hurdle, analysts on Wall Street are optimistic about AMD's long-term potential. As we approach the Q3 earnings report, the consensus rating for AMD stock remains a “Strong Buy.” Analysts have set an average price target of $193.06, suggesting expected upside of about 21% from the current price.
