Tech stocks have experienced a notable rally this year, fueled by growing enthusiasm surrounding artificial intelligence (AI) despite broader macroeconomic challenges. Among these tech stocks, semiconductor chip companies are reaping the benefits of the AI buzz. While Nvidia (NASDAQ:NVDA) stands as a dominant figure in the chip industry, there are promising AI chip stocks set to shine as the AI era unfolds.
One such contender is Advanced Micro Devices (NASDAQ:AMD), a company with a market valuation of $164.49 billion. Known simply as AMD, this semiconductor giant has played a pivotal role in the industry for over five decades. Over the past decade, AMD has impressively surged by 3,120%, with a remarkable 300% increase in the past five years alone.
More recently, AMD’s shares have risen by 56% year to date, outpacing the tech-heavy Nasdaq Composite, which saw a 24% gain. Additionally, Wall Street holds the belief that AMD is strategically positioned to harness the potential in the AI market in the forthcoming years, despite fierce competition.
Strengthening AMD’s Fundamentals
AMD’s earnings have surpassed analysts’ expectations in the last two quarters, even amid a slowdown in its data center business during the first half of 2023. While data segment revenue in Q2 experienced an 11% year-over-year decline to $1.3 billion, it managed a 2% sequential growth due to the swift adoption of the 4th Gen EPYC CPU and increasing demand in the cloud market. Notably, the net revenues for Q2 reached $5.36 billion, slightly down from the previous year’s $6.5 billion.
At the close of the quarter, AMD held $6.3 billion in cash, cash equivalents, and marketable securities while reducing total debt from $2.5 billion in Q1 to $1.7 billion. The company also reported $254 million in free cash flow.
During the Q2 earnings call, CEO Lisa Su announced the launch of 30 new AMD instances, with multiple Genoa instances backed by tech giants like Amazon’s Amazon Web Services (AWS), Alibaba, Microsoft’s Azure, and Oracle. Looking ahead, AMD anticipates double-digit sequential growth in Data Center and Client segment revenues, driven by the surging demand for EPYC and Ryzen processors. Specifically, EPYC revenue is projected to experience a double-digit percentage increase in Q3, thanks to the heightened interest in 4th Gen EPYC CPUs. AMD’s management envisions the AI accelerator market growing to approximately $150 billion by 2027 and identifies it as a multibillion-dollar growth opportunity across cloud, edge, and an increasing number of intelligent endpoints.
Raising the Stakes in the AI Race
Graphics processing units (GPUs) are at the forefront of AI acceleration, and Nvidia is currently a dominant player in this market. AMD, however, is determined to compete effectively as AI progresses, fostering a growing demand for efficient and scalable AI computing solutions. Even Microsoft’s chief technology officer, Kevin Scott, acknowledges the potential significance of AMD’s GPUs in the years to come.
Notably, AMD recently expanded its reach beyond the data center segment with a significant acquisition. The company inked a definitive agreement to acquire Nod.ai to enhance its open AI software capabilities within its hardware offerings. The acquisition is aimed at advancing open-source compiler technology and enabling high-performance AI solutions across AMD’s product portfolio. Management also foresees opportunities in generative AI, with rising customer interest in its MI300A and MI300X GPUs, competitive alternatives to Nvidia’s A100 and H100 GPUs, set for launch in Q4 2023. In comparison, Nvidia expects a growing demand for its H100 chips and forecasts around $16 billion in revenue for its Q3 fiscal 2024.
Furthermore, on October 19, AMD unveiled a range of AI-powered high-end processors, including the Ryzen Threadripper PRO 7000 WX-Series processors and the reintroduced Ryzen Threadripper 7000 Series processors, which are claimed to be the world’s fastest desktop processors.
What Analysts Are Saying About AMD
Baird Equity Research recently adjusted its 2024 revenue estimates for AMD, expressing concerns about the company’s data center business. The analysts were skeptical of AMD’s decision to accelerate the launch of its MI300 chip in the fourth quarter, noting the company’s “lack of design wins outside of supercomputing applications so far and […] the absence of a well-established software ecosystem.” Baird also lowered AMD’s target price from $170 to $125. While the escalating U.S.-China tensions pose a potential challenge to chipmakers like AMD, a majority of Wall Street remains optimistic about AMD’s stock potential in the fast-growing AI sector.
For the third quarter, analysts predict revenue of $5.7 billion and earnings per share of $0.49. AMD is scheduled to release its Q3 earnings on October 31. After generating $23.6 billion in revenue in fiscal 2022, analysts anticipate a modest 3.3% drop to $22.8 billion in fiscal 2023. However, they foresee a revenue increase to $27.3 billion in fiscal 2024. In terms of earnings per share, analysts expect an uptick from $0.84 in fiscal 2022 to $2.01 in fiscal 2023 and $3.22 in fiscal 2024. AMD is currently trading at 24 times forward earnings, which seems to align with 2024 growth forecasts.
Of the 28 analysts covering AMD, 21 rate it as a “strong buy,” one suggests a “moderate buy,” and six designate it as a “hold.” There are no sell recommendations for the stock. Based on the average price target of $139 from analysts, Wall Street envisions a potential 37% upside in the next 12 months, with the highest target at $200 and the lowest at $80 for AMD.
The Bottom Line on AMD
In summary, Advanced Micro Devices is well-positioned to take advantage of the recovering Data Center market and the rising prospects of AI in the years ahead. With a robust portfolio of innovative products, AMD is poised to continue shaping the future of computing. While the ongoing rally in AI stocks is enticing, investors should remain vigilant about risks, as the tech sector remains sensitive to macroeconomic challenges. A well-balanced investment strategy, combining top AI stocks like AMD with stable options, is a prudent approach for long-term investors.
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