Is AMD Stock a Buy Now?

Advanced Micro Devices(NASDAQ: AMD) red-hot year-long stock market rally came to a screeching halt after the company released mixed Q4 2023 results on Jan. 30. Wall Street wasn’t impressed with AMD’s guidance for the current quarter, which explains why the share prices retreated.

Let’s look at the reasons why investors pressed the panic button following AMD’s latest report.

AMD’s results weren’t as bad as the initial market reaction suggests

AMD’s Q4 revenue increased 10% year over year to $6.17 billion, exceeding the consensus estimate of $6.13 billion. The company’s adjusted earnings also jumped 12% from the year-ago period to $0.77 per share, matching analysts’ expectations.

AMD pointed out that strong sales of its data center graphics processing units (GPUs), which hit a record last quarter, along with an increase in sales of Epyc server central processing units (CPUs) and Ryzen consumer CPUs helped the company clock year-over-year growth last quarter.

It is worth noting that AMD struggled to achieve growth for the majority of 2023 on account of weakness in the personal computer (PC) market, which substantially hurt the sales of the company’s client CPUs. More specifically, PC shipments fell almost 13% in 2023, according to research firm Canalys.

As a result, AMD’s revenue from its client processor business was down 25% in 2023 to $4.65 billion. This explains why its 2023 revenue fell 4% year over year to $22.7 billion. Its non-GAAP earnings dropped 24% last year to $2.65 per share.

However, the PC market has started turning around. Canalys estimates that PC sales increased 3% year over year in the fourth quarter of 2023, leading to a sharp jump in demand for AMD’s client processors. The company saw a solid year-over-year increase of 62% in its client processor revenue last quarter to $1.46 billion. What’s more, its data center revenue was also up 38% from the prior year to $2.28 billion in Q4 as sales of the company’s AI processors rose.

Management’s guidance, however, wasn’t up to the mark. AMD expects $5.4 billion in revenue in the current quarter at the midpoint of its forecast, missing the $5.7 billion consensus estimate. Its revenue will remain almost flat on a year-over-year basis. The non-GAAP gross margin guidance of 52%, however, points toward an increase of 2 percentage points over last year, indicating that AMD’s bottom line could grow once again this quarter.

The reason why the chipmaker’s guidance couldn’t pass muster was certain pockets of weakness. The company pointed out that server sales are set for a seasonal slump in the current quarter. Additionally, “Embedded and Gaming segment sales are expected to decline sequentially, with semi-custom revenue expected to decline by a significant double-digit percentage.”

However, investors should not miss the silver linings. AMD CFO Jean Hu remarked on the latest earnings conference call: “Year over year, we expect Data Center and Client segment revenues to increase by strong double-digit percentage[s] given the strength of our product portfolio and the share gain opportunities.”

These two divisions produced 60% of AMD’s total revenue last quarter, and there is a good chance that they could help the company deliver better-than-expected growth thanks to artificial intelligence (AI). This probably explains why the stock has bounced back after the initial negative reaction to its Q4 results.

The chipmaker’s AI opportunity is expanding rapidly

AMD CEO Lisa Su estimates that the company could finish 2024 with data center GPU revenue of $3.5 billion. That’s a big increase over the company’s prior expectation of $2 billion in data center GPU sales this year. However, that figure is lower than the $8 billion in segment revenue that certain Wall Street analysts expected AMD to report this year.

Still, investors should note that the company’s AI-driven data center GPU revenue pipeline annual estimate has jumped an impressive 75% in the space of just a quarter thanks to a “strong customer pool and expanded engagements.” This suggests that more customers are opting for AMD’s MI300 family of AI accelerators. Moreover, management says that it has “made significant progress with our supply chain partners and has secured additional capacity to support upside demand.”

The demand for AI chips is set to skyrocket in 2024 and beyond, and companies are reportedly having to wait for long periods to get their hands on AI GPUs from the likes of Nvidia. Given that AMD claims to have secured enough supply to meet any jump in demand, it won’t be surprising to see its data center GPU revenue estimates heading higher as the year progresses.

AMD’s data center business generated $6.5 billion in revenue in 2023, of which around $400 million came from sales of data center GPUs. So its $3.5 billion forecast suggests that its overall data center revenue could see a big jump in 2024 as its AI processors gain traction.

Furthermore, AMD’s client processor business could gather steam as the year progresses thanks to the company’s laser-like focus on the market for AI-powered PCs. The chipmaker recently updated its client CPU lineup, claiming that its new processors deliver “up to 60% more AI performance compared to our prior generation that was already industry-leading.”

Su also stated that “millions of AI PCs powered by Ryzen processors have shipped to date and Ryzen CPUs power more than 90% of AI-enabled PCs currently in [the] market.” While there is no independent verification of that claim, it is worth noting that AMD moved fast in the market for AI PCs last year. This may have contributed to the stronger year-over-year growth in its client processor revenue in Q4 as compared to Q3 2023 when this segment’s revenue was up 42% year over year.

The market for AI PCs is expected to boom in the long run, with an estimated annual growth rate of 50% through 2030, according to Counterpoint Research. This could help AMD’s fast-growing client processor business sustain its impressive growth.

Is the stock a buy right now?

One reason why investors may have panicked following AMD’s latest guidance is its valuation. The stock trades at 12.7 times sales. That’s rich when we consider that the S&P 500 carries an average price-to-sales ratio of 2.7. What’s more, fast-growing AI stocks such as Super Micro Computer can be bought at a much lower sales multiple.

So, the forecast for flat year-over-year revenue didn’t do enough to justify that rich valuation, especially considering that certain Wall Street analysts believe that AMD’s potential AI-driven growth is baked into its share price already. However, AMD could clock faster growth thanks to AI and justify its valuation, which is why it may be a good idea to buy this tech stock before it flies higher.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.

Is AMD Stock a Buy Now? was originally published by The Motley Fool