AMD Stock Dips Following Earnings Report, But Company Shows Strong AI Growth Potential

Advanced Micro Devices stock (NASDAQ: AMD) has seen a decline of about 13% over the last two trading days after revealing its Q3 earnings report. The company’s guidance for the next quarter fell slightly below expectations, with forecasts for Q4 revenues between $7.2 billion and $7.8 billion, slightly missing the $7.55 billion consensus estimate. However, AMD had a solid performance where it counted, as both earnings and revenues exceeded forecasts, largely driven by robust demand for AI chips. Notably, sales from the data center segment – AMD’s most critical area – soared to $3.5 billion, a substantial increase from $1.59 billion in Q3 2023 and significantly above predictions. AMD has also increased its outlook for GPU sales, now projecting over $5 billion in data-center AI GPU revenue for 2024, up from $4.5 billion in July. See our analysis AMD Stock: The Road To $300.

Volatility in Historical Returns: AMD vs. S&P 500

Despite the recent drop, AMD stock has performed well over the past four years, albeit with notable fluctuations. For instance, returns were 57% in 2021, -55% in 2022, and 128% in 2023. Comparatively, the Trefis High Quality (HQ) Portfolio, which includes a selection of 30 stocks, has experienced less volatility while outperforming the S&P 500 each year within that timeframe. This difference may stem from the HQ Portfolio stocks yielding better returns with reduced risk, resulting in a steadier performance.

AMD’s Ambitious AI Strategy

AMD is capitalizing on the surging demand for generative AI, positioning itself as a key player in the market. Initially focused on GPUs for gaming and design, AMD has swiftly adapted to meet the needs of large language model training and inference for generative AI. The company has introduced its Instinct MI325X chips to compete directly with Nvidia’s Blackwell chips. Although Nvidia (NASDAQ: NVDA) has established a significant foothold in AI-GPU technology, AMD is concentrating on specific areas to gain market share, such as its upcoming CDNA 4-powered MI350 GPU series, which is set to launch in late 2025 and promises 35 times better performance than its predecessor.

Inference and Customer Adoption

Inference, which involves making predictions based on trained AI models, is becoming vital as the AI industry evolves from training models to deploying them in real-world scenarios. AMD has been strategically positioning its AI chips as viable options for applications in content creation and forecasting. Given the increasing complexity of AI models that handle speech, images, video, and 3D data, this could provide AMD with a considerable advantage.

Positive Customer Endorsements

Feedback from customers indicates satisfaction with AMD’s direction. For instance, Oracle recently selected AMD’s accelerated computing chips for its latest high-performance supercluster targeting demanding AI workloads. Post-testing, Oracle found that AMD’s GPUs delivered low latency and impressive performance at competitive prices. As Nvidia’s GPUs can exceed $25,000 each, alternatives like AMD are increasingly appealing to customers striving for cost-effective solutions, potentially boosting AMD’s data center GPU business.

Improving Margins and Future Outlook

AMD’s adjusted gross margins are on an upward trend, increasing from approximately 50% in Q3 2023 to 53% in Q3 2024, thanks to better economies of scale and a more favorable mix towards complex data center products. This contrasts with margins of around 40% in 2019. It’s anticipated that margins could rise further to about 55% as AMD benefits from increased GPU sales and improved fixed cost absorption. The growing demand for AI applications and the need for alternatives to market leader Nvidia signal that AMD’s AI chip sales may exceed previous forecasts.

Valuation and Market Position

Currently, AMD trades at roughly 46 times consensus 2024 earnings. While this high multiple might raise eyebrows, it is backed by a recovery in the PC market and a rise in AI application demand. Furthermore, potential monetary easing from the U.S. Federal Reserve could favor AMD, as lower interest rates might reduce costs for organizations building large data centers, promoting increased capital expenditures in the sector. Our valuation estimates AMD stock at about $160 per share, which is approximately 10% above its current market price. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for detailed insights into our price estimates for AMD. Additionally, check out our analysis of AMD Revenue for more information on the company’s key revenue sources.

[1] Returns as of 11/1/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.