The new Advanced Micro Devices, Inc. (NASDAQ:AMD) development of their 2.5/3D AI chips marks a pivotal step towards a future of leading the AI computing chip sector. I believe the market has yet to fully acknowledge the transformative role these advanced chips will play in reshaping data centers and accelerating the AI revolution. As we approach AMD’s Q4 earnings release post-market on January 30th, I think the main focus is on the potential of 2.5/3D chips. I think as these chips gain traction the company’s revenue growth will accelerate. I think AMD stock is a buy going into earnings.
Revolutionary Evolution: The Emergence of 2.5/3D Chips
The development of 2.5/3D chips represents a significant shift in semiconductor design, enabling a new echelon of complexity and integration beyond traditional planar chips. These chips incorporate multiple chiplets or dies into a single package, greatly enhancing performance, reducing power consumption, and optimizing space. AMD’s new MI300X series, including products like the MI300X, consists of 3D chips and is noted for their advanced memory, such as the integration of HBM3, offering up to 192 GB of total memory and 5.6 TB/sec bandwidth, a significant improvement from previous generations. The chip series was unveiled on December 6th, 2023.
Unleashing the Potential: Impact on AI Datacenters
In AI data centers, the impact of 2.5D and 3D chip technologies, as (for example) presented by AMD’s MI300X series is transformative. These technologies allow for a denser integration of computing power in a smaller footprint, crucial for the increasingly complex and demanding AI and model training workloads. The combination of advanced memory and high bandwidth in chips like the AMD MI300X and MI300A produce more efficient and effective processing of data-intensive AI applications.
These 2.5D and 3D stacking technologies are key factors in successfully meeting the performance requirements and the high demand for AI and data center applications. The overall market for these stacking technologies, driven by High-Performance Computing (HPC) applications, is expected to showcase rapid growth, with the HPC market projected to reach $107.48 billion by 2033 (over double from 2023). This market demands 3D chip technology.
Strategic Superiority: Why AMD is Poised to Thrive
On October 27th, 2020, AMD and Xilinx agreed to merge, resulting in AMD gaining a vast array of high-performance and adaptive computing products such as CPUs, GPUs, FPGAs, and Adaptive SoCs. This move by AMD vastly expanded their capabilities in offering comprehensive and adaptive computing solutions. Xilinx’s expertise in adaptable computing and networking enhances AMD’s product portfolio, therefore helping secure a position for AMD in the rapidly evolving high-performance computing world. AMD joined forces with Xilinx due to their expertise in 2.5/3D chips. AI chips are starting to show how this transaction is starting to pay off.
AMD’s focus on 2.5/3D chip technology, as shown in the launch of their Instinct MI300X series, uniquely positions the company to compete in the AI and HPC markets. These chips offer an integrated package of CPU and GPU functionalities, significantly enhancing performance while optimizing power consumption. The MI300X series, especially the MI300X, can boast over 150 billion transistors and deliver memory capacity and bandwidth that surpasses the NVIDIA Corporation (NVDA) H100, the current market leader. With 2.4 times the memory and 1.6 times the memory bandwidth of the H100, AMD’s MI300X is designed to offer superior AI inferencing performance. AMD is literally stacking chips vertically to beat Nvidia (it makes 13 pieces of silicone behave as one chip). Impressive.
Claims from Nvidia arose that while testing the Nvidia hopper, AMD did not use the most recent TensorRT-LLM kernel optimizations, therefore their data was invalid. AMD responded stating that at the time of the testing, Nvidia’s most recent data was not accessible, but after further advancements made within the MI300X, AMD still outperforms Nvidia’s optimized TensorRT-LLM.
Earnings Anticipation: What to Expect
As AMD heads into earnings on January 30th, the projections are guiding for growth as the sales of the MI300X series begin to accelerate.
For the fourth quarter of 2023, AMD management has guided revenue to hit approximately $6.1 billion, representing a year-over-year growth of about 9% and sequential growth of approximately 5%, with a non-GAAP gross margin of about 51.5%. For Q4, EPS is forecasted to increase from $0.69 to $0.77, representing 11% year-over-year growth. According to AMD management, the team is estimating about $2 billion in sales for 2024 for the MI300X chip series. I think this is conservative guidance (more on this later).
Wall Street is specifically estimating sales of $6.14 billion for Q4, which is slightly above guidance.
Earnings Call Priorities
As the earnings call approaches, my attention is especially focused on updates on the sales of AMD’s MI300X chip series. AMD claims that their revenue will stand at $2 billion, but I believe this is a severe underestimate. Meta Platforms, Inc. (META) stands as a big reason why.
One of Meta’s long-term goals is to increase their research in artificial general intelligence (AGI). The programming of their new Llama 3 model requires the use of a ton of chips. A recent announcement by Meta states that their AI training center will contain 600,000 GPUs, 350,000 of which will be H100 chips from Nvidia (based on what CEO Mark Zuckerberg said).
This leaves 250,000 “H100 equivalents” that Zuckerberg said would be part of his massive GPU cluster. Meta already stated they will be a customer of this new chipset.
Since AMD is a leading figure in this market (after Nvidia), we can assume that AMD could reasonably capture 50% of the leftover 250,000 chips needed for Meta, (125,000 units). The discrepancy here is that AMD is claiming they expect to only sell about 100,000 of their MI300X chips (2 billion in revenue in 2024 divided by an average selling price (ASP) of $20,000 is 100,000 chips implied).
Assessing AMD’s Potential with the MI300X Series Chip
As the tech industry continues to evolve, the competition for dominance in the AI chip sector has intensified. AMD has made significant strides with the unveiling of its MI300X series chip, touted as a game-changer in high-performance computing. This development has sparked discussions about the potential impact on the company’s revenue, market valuation, and overall positioning within the industry.
A Potential Revenue Breakthrough
With the performance comparison demonstrating Llama 2’s heightened training capabilities with the MI300X chip in contrast to Nvidia’s H100, confidence in AMD’s potential to secure a substantial portion of Meta’s purchases has surged. This prospect has raised expectations, with projections indicating that AMD could exceed the anticipated $2 billion in revenue. The prospect of Meta’s purchase of 125,000 M1300X chips, each estimated at roughly $20,000, suggests a revenue of $2.5 billion. Amid these developments, attention is keenly focused on any updates regarding AMD’s relationship with Meta during the upcoming earnings call.
Evaluating Valuation
Examining the potential impact, it becomes apparent that AMD may be underestimating the revenue potential of the MI300X series. With Meta’s significant demand for M1300X chips, the projected figures surpass AMD’s initial annual revenue estimates. Accounting for potential orders from other parties, the shipment of 300,000 to 400,000 M1300X chips in 2024, as suggested by analysts, presents a compelling perspective. Even with the conservative estimate of 350,000 units on top of Meta’s procurement, at an average selling price of $20,000, the marginal revenue could reach $7 billion. In combination with Meta’s additional $2.5 billion in revenue, a potentially underappreciated revenue of $7.5 billion ($9.5 billion total revenue minus the $2 billion guidance) comes to light.
Furthermore, an evaluation of AMD’s current valuation at 12.42 forward sales compared to the 2.90 sector median raises strategic considerations. Factoring in these metrics, along with the potential revenue variance, unveils a significant market cap appreciation potential of $57.45 billion. This realization hints at a possible 20% share price upside for AMD, granting that the assumed price-to-sales multiple of 7.66 is sustained and considering no additional shares are issued.
Assessing Risks
While AMD’s MI300X series asserts itself as an emerging force in the AI chip arena, inherent risks demand attention. Despite being lauded as “the most advanced AI accelerator in the industry” by AMD’s CEO Lisa Su, the MI300X is a substantial investment, priced at $20,000 per unit. This raises considerations, especially in an industry where profitability within AI investments remains a challenge. Any potential downturn in the industry could have reverberating effects, impacting chip sales and disrupting revenue streams.
The Verdict
The imminent earnings announcement all but underscores the pivotal role played by the MI300X series in positioning AMD at the forefront of high-performance computing and AI innovation. The promise of substantial enhancements in performance, energy efficiency, and total cost of ownership cements AMD’s position in the industry. Enthusiasm remains high in anticipation of the forthcoming earnings call, expected to underscore the positive influence of the MI300X series and potentially bolster confidence in AMD’s stock as a strategic investment amidst the evolving tech landscape.
5 Stocks Our Experts Predict Could Double In the Next Year
By submitting your email, you'll also get a free pivot & flow membership. A free daily market overview. You can unsubscribe at any time.
