Advanced Micro Devices (NASDAQ: AMD) is making strides in the artificial intelligence (AI) arena. Though NVIDIA (NASDAQ: NVDA) continues to lead the market, largely due to its early entry, AMD is a strong contender. Currently, NVIDIA holds an estimated 95% share of the AI data center market. AMD occupies a significant portion of the remaining market and has the potential to recover its previous losses to NVIDIA. This could translate to over 1000 basis points in market share growth, complemented by a robust organic industry expansion that promises to enhance revenue, earnings, and shareholder value. Overall, the industry is witnessing accelerating growth. AMD CEO Lisa Su recently indicated a projected compound annual growth rate (CAGR) of 60% over the next five years at an investor day event.
The demand for AMD’s AI-oriented chips is backed by substantial industry usage. Major companies like Hewlett Packard Enterprises (NYSE: HPE), Meta Platforms (NASDAQ: META), and Oracle (NYSE: ORCL) are leveraging these chips for high-performance computing (HPC) applications that require minimal latency. Notably, Oracle announced a supercluster capable of connecting over 16,000 MI300X chips, utilizing a range of AMD-provided tools. Likewise, Hewlett Packard Enterprise is integrating eight MI325X chips and two EPYC CPUs into its latest servers, the HPE Proliant XD685, designed for AI service providers and large model developers.
The effectiveness of AMD’s ROCm suite, which is comparable to NVIDIA’s CUDA, plays a crucial role in the company’s success. This enables programmers to fully exploit the power of AMD’s GPUs for AI computing. Although NVIDIA has the first-mover advantage, AMD is well-positioned for growth and is likely to surpass consensus forecasts, enhancing shareholder value in the upcoming quarters.
AMD’s Q3 Forecast: A Cautious Approach Amid Continued Growth
AMD’s guidance for Q3 projects a solid, yet conservatively set, benchmark. The company anticipates $6.71 billion in net sales, reflecting a 15% increase and a step up from the previous quarter, though this rate lags behind both industry growth and AI competitors. The data center segment, which saw triple-digit growth in Q2, is expected to sustain this momentum in Q3, albeit offset by slower growth in the client segment and normalizing trends in the gaming division.
This data center business has become critical, now comprising nearly 50% of revenue for the first half of the year, with continued gains anticipated. Although gaming revenue may decline in Q3 compared to last year, the rate of decrease is expected to slow, with growth anticipated to resume in 2025. Nevertheless, AMD investors should be aware of potential risks, such as government regulations. The U.S. government may consider export bans to mitigate the spread of AI technology to adversarial countries, which could restrict global market access.
Despite these challenges, the overall guidance is set to influence market responses, irrespective of growth performance in Q3. The revenue outlook implies an additional 15% increase for the year and an expansion of profit margins, potentially underestimating actual demand for AMD products. Key highlights from the upcoming Quarter include the rollout of the Ryzen AI Pro 300 series chips, designed to enhance Microsoft Copilot AI assistance and outperform competitors by 40% in speed, with expected productivity boosts of up to 14% for enterprise workloads. Additional product highlights include the Turin EPYC data center CPUs that will compete with NVIDIA’s Blackwell, set to launch in Q1 2025.
Analysts Anticipate Positive Trajectory for AMD’s Stock
In light of recent events, analysts have raised their price estimates for AMD shares while simultaneously adjusting earnings projections downward. The consensus estimate has increased over 40% since late 2023, indicating nearly a 20% upside from the current $160 level ahead of the Q3 earnings announcement. Updates following the Q2 release have solidified price targets within the range of $180 to $200, aligning with the broader consensus. A strong earnings report would likely serve as a catalyst for market movement.
Thus far, AMD stock has seen a restrained reaction following the investor day and product announcements in October. The stock has dipped nearly 10% from its recent high and may continue to trend downward until the earnings report emerges. Observers should note a critical support level around $152.50, which may soon be tested, presenting a potential entry point for traders and investors. Should this support fail, there is a possibility of reaching $140, with $120 as a further risk.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
