AMD Stock Surged 6% Yesterday. Here’s Why.

Advanced Micro Devices stock (NASDAQ: AMD) gained close to 6% in Thursday’s trading and also remains up 6% year-to-date. This compares to rival Intel stock which has seen its stock decline by about 55% this year. So what are some of the trends driving AMD Stock’s recent gains?

The Fed cut interest rates by 50 basis points on Wednesday, marking the first interest rate cut in close to four years. Also, check out our analysis of other ways to profit from the Fed’s next move?  With the current benchmark federal funds rate standing at 4.75% to 5% post the cut, there still remains room for the central bank to lower interest rates further. Lower rates are typically beneficial for growth sectors including technology, which have higher earning potential in outer years, as lower discount rates boost the present value of future earnings. Lower interest rates could also reduce financing costs for builders of large data centers, potentially driving up capital spending in the space, and helping players like AMD which sell CPUs and GPUs for servers.  Besides this, there have been reports that AMD has secured the contract to design the processor for Sony’s yet-to-be-announced next-gen PlayStation 6, edging out Intel. The deal will help AMD to continue its long-term relationship with Sony, as the company designs the chip for the PlayStation 5. Although the PS6 is expected to launch in 2027 or beyond, it could be a reasonably large money spinner for AMD, given that Sony has already shipped about 62 million PS5 consoles.

AMD has also seen some tailwinds from the generative AI trend. 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 recently upped its guidance for MI300 sales this year to $4.5 billion and the number could be still 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. To be sure, AMD’s peer Nvidia has been the hottest of the AI stocks, rising 2.5x this year. But did you that there is a lesser-known AI name that could offer more upside than Nvidia?

Now the increase in AMD stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 57% in 2021, -55% in 2022, and 128% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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 $168 per share, about 7% above the current market price.  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.

While investors have their fingers crossed for a soft landing for the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/20/2024
[2] Cumulative total returns since the end of 2016

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