Will AI Surge And Strong PC Sales Drive A Q2 Beat For AMD Stock?

Advanced Micro Devices stock (NASDAQ: AMD) is expected to publish its Q2 FY’24 results toward the end of July,  reporting on a quarter that is likely to see the company benefit from an improving PC market and higher demand for artificial intelligence chips. We expect AMD revenues to come in at $5.73 billion, marking an increase of 7% compared to last year, while earnings are likely to come in at about 0.68 per share, slightly ahead of consensus estimates, and 17% year-over-year. See our analysis of Advanced Micro Devices Earnings Preview for a closer look at what to expect when the company publishes Q2 earnings.

We expect AMD’s CPU sales to remain strong, driven by rising PC sales. Over Q1 2024, sales for the client segment stood at $1.4 billion, up 85% year-over-year driven primarily by AMD Ryzen 8000 Series processors. For Q2, global PC shipments grew 3.1% year-over-year to reach 62.5 million, per Counterpoint. AMD’s growth could be a bit better, as PC vendors worked through chip inventory that they built through the pandemic over the first few quarters of 2023. This could result in stronger demand for the likes of AMD as PC vendors replenish their inventory. On the server side, AMD’s chips such as the fourth generation of the AMD EPYC CPUs could continue to gain market share over rival Intel, which faced delays in transitioning to smaller, more advanced process nodes. AMD’s GPU sales are also likely to expand meaningfully, considering the surge in demand. Graphics processing units are becoming the de-facto chips for running AI-related workloads. . AMD has launched new chips, such as the MI300X chip, targeted at large language model training and inference for generative AI workloads. AMD previously guided AI-related chip sales of at least $3.5 billion for 2024 and the number will likely be meaningfully higher given the surging demand for AI applications and the need for alternatives to market leader Nvidia. The stronger revenue base and potentially more favorable product mix should drive AMD’s profits higher. For Q2, the company has guided gross margins of 53% for the year, up about 100 basis points sequentially.

AMD stock has seen extremely strong gains of 65% from levels of $90 in early January 2021 to around $150 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period.
However, the increase in AMD stock has been far from consistent. Returns for the stock were 57% in 2021, -55% in 2022, and 128% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AMD underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMD face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

AMD stock has seen a meaningful rally over the past year. AMD trades at about 44x consensus 2024 earnings, which is a relatively high multiple. However, the ongoing recovery in the PC market and surge in demand from AI applications could justify this to an extent. We value AMD stock at about $163 per share, about 8% above the current market price.  We will be revisiting our price estimate for the company following Q2 results. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for more details on what’s driving our price estimate for AMD. Also, check out our analysis of AMD Revenue for more details on the company’s key revenue streams.

[1] Returns as of 7/20/2024
[2] Cumulative total returns since the end of 2016

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