HomeMarket NewsDown 30% From All-Time Highs, Is AMD Stock a Buy?

Down 30% From All-Time Highs, Is AMD Stock a Buy?

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Shares of Advanced Micro Devices (NASDAQ: AMD) have pulled a stunning round trip so far in 2024. Following managementโ€™s increasingly upbeat commentary on sales related to artificial intelligence (AI) early in the year, the stock soared higher.

But then reality started to settle in after the first-quarter update, and shares are now down about 30% from those peaks, reached early in the spring.

If youโ€™ve been following along, thereโ€™s always been a clear-cut reason to be optimistic about AMD โ€” and a clear-cut reason to be skeptical. Is it time to buy the stock dip?

AI is gonna be huge โ€” what happened?

Entering 2024, CEO Lisa Su and her team were getting increasingly optimistic about AI chip sales. Su has stated an expectation for $2 billion in accelerated-computing sales (accelerated computing being the real trend behind the scenes, not simply AI). But then in January, the outlook was raised to $3.5 billion.

For a company that had $22.8 billion in sales in the last reported 12-month stretch, AI chips thus represent a significant โ€” but not massive โ€” new market. The new MI300 accelerated-computing system is reportedly AMDโ€™s fastest product to ramp up to $1 billion in revenue, reaching that status in just two quarters.

Suffice to say investors were excited.

But the reality check? Despite the glowing reviews of AMD AI, that $3.5 billion outlook for 2024 AI sales wasnโ€™t raised again during the first-quarter update.

And the guidance for the second quarter was also a bit lackluster. At the midpoint of guidance, the expectation for the quarter is for revenue of $5.7 billion, up 4% from the prior quarter and just 6% from the previous year โ€” when AMD results were still down in the dumps from the bear market.

Hopes are (rightfully) diminishing that AMD data-center AI revenue can go parabolic like Nvidiaโ€˜s has.

AMD Revenue (TTM) Chart

Data by YCharts.; TTM = trailing 12 months.

AMDโ€™s focus canโ€™t be the same as Nvidiaโ€™s

As Iโ€™ve written numerous times since the completed acquisition of Xilinx in early 2022, the most important reason AMD could continue to be a winning semiconductor stock is rising profit margins.

This was the reason I was skeptical about AMD stock rallying aggressively in recent months. Hidden behind all of managementโ€™s AI talk the last few quarters was a more somber message about needing to get profit margins back on track.

Indeed, the bear market did a number on AMD โ€” especially with cratering consumer spending on PCs and laptops (its client revenue segment). The segmentโ€™s operating profit was $86 million in the first quarter, for a margin of only 6%. Thereโ€™s tremendous room for improvement as consumer PC spending stabilizes this year.

Data center AI chips arenโ€™t quite providing the massive offset to weakness in other parts of the business, like embedded (Xilinx) and gaming (video game consoles). But what AMDโ€™s data center lacks in revenue-growth sizzle, it does make up for in profit-margin expansion. Operating margins were 23% in the first quarter, versus a meager 11% the year prior.

AMD Operating Margin (TTM) Chart

Data by YCharts.

AMD still has a way to go until it returns to anywhere near its last peak level of profitability in 2022. But if it gets back on a positive trajectory, shares could still be a reasonable deal at 46 times https://www.fool.com/terms/f/forward-pe/, though maybe not a particularly amazing value.

Letโ€™s just pretend like the new all-time highs in the stock this spring never happened at all, rather than call this a dip. Iโ€™m a shareholder, patiently waiting to see how this story pans out, but Iโ€™m not buying at this time.

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Nicholas Rossolillo and his clients have positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

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

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