AMD Faces Challenges Amid Solid Performance: A Closer Look
Investors in Advanced Micro Devices (NASDAQ: AMD) have had a tough year in 2024. Shares are down 4%, while the PHLX Semiconductor Sector index has surged nearly 20% during the same period.
On October 29, AMD released its third-quarter results, and despite posting healthy revenue and earnings growth, Wall Street showed disappointment. The company’s underwhelming progress in the artificial intelligence (AI) chip market and weaker guidance led to a sharp drop of over 10% in AMD stock after the announcement.
A deeper examination of AMD’s quarterly results suggests that the market overreacted. Savvy investors might find this an opportunity to consider buying AMD stock, especially with potential better performance anticipated in 2025. Here’s why.
Strong Financial Results Highlight Growth Potential
AMD’s revenue for Q3 soared 18% year over year, reaching $6.8 billion, and adjusted earnings per share jumped 31% to $0.92, in line with analysts’ expectations while surpassing revenue estimates of $6.71 billion.
The company registered a remarkable $3.5 billion in data center revenue last quarter, marking a staggering 122% increase year-over-year. This significant growth is attributed to the high demand for AMD’s Instinct series of data center graphics processing units (GPUs), primarily utilized in AI servers. AMD now predicts it will finish 2024 with at least $5 billion in data center GPU revenue, an increase from its previous forecast of $4.5 billion.
Initially, AMD had anticipated just $2 billion in data center GPU revenue at the year’s start, signaling its gradual but steady gains in the AI chip sector. With companies like Microsoft and Meta Platforms adopting AMD’s MI300 series of AI accelerators, the forecast for AI chip revenue has also improved. Additionally, cloud providers such as Oracle are deploying AMD’s MI300X GPUs.
Furthermore, AMD sees robust interest in the newly launched MI325X GPU and plans to continue advancing product development. The next-generation MI350 series chips are expected to launch in the latter half of 2025, followed by the MI400 family in 2026.
Even though AMD’s data center GPU business is smaller than that of Nvidia, the possibility for multiple players in the market exists. With projected AI GPU market size reaching $500 billion by 2028, AMD could significantly enhance its data center revenues with even a modest market share.
To date, AMD has generated $8.7 billion from data center chips in the first three quarters of 2024, suggesting a yearly run rate of $11.6 billion. Of this amount, approximately $5 billion is expected from AI GPU sales, supporting the company’s growth outlook.
Catching just a 10% share of the AI GPU market could lead to a tenfold increase in revenue from this segment over the next four years, further driving growth. However, AI GPUs are not the sole area where AMD stands to gain from the AI boom.
AMD’s Epyc server CPUs are in high demand by cloud service providers for AI workloads. The company claims that its processors power key services such as Office 365, Facebook, and Salesforce. Notably, over 130 enterprise platforms are currently being developed using AMD’s fifth-generation Epyc server CPUs.
With both Alphabet and Meta deploying these new Epyc processors for AI purposes, AMD’s position appears strong. According to Futurum Intelligence, CPUs currently represent about 20% of the AI chip market, with expectations for steady relevance in the next five years. Forecasts suggest sales of CPUs in AI servers could rise to $26 billion by 2028, compared to $7.7 billion last year, presenting a solid growth opportunity for AMD.
Promising Guidance for Future Performance
Amd’s guidance for the current quarter indicates an expected revenue of $7.5 billion, slightly below the consensus estimate of $7.55 billion. However, this still represents a 22% year-over-year jump, a positive increase from the 18% growth observed last quarter.
Additionally, the projected non-GAAP gross margin of 54% suggests an improvement from 51% in the same quarter last year. Analysts anticipate a robust 53% increase in AMD’s earnings next year, reflecting strong demand and operational efficiency.
AMD EPS Estimates for Current Fiscal Year data by YCharts.
Given these promising indicators, the market could reward AMD with solid gains next year. Currently trading at 28 times forward earnings, AMD’s valuation is below the Nasdaq-100 average of 30.4, making it a potential buy for investors.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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