What’s Happening With AMD Stock?

Advanced Micro Devices stock (NASDAQ: AMD) has fared well over the past month, rising by close to 20%. This is roughly in line with rival Intel stock (NASDAQ: INTC) which has gained about 19% over the same period. AMD has benefited from a couple of factors, including the Fed’s recent interest rate cut as well as recent customer wins for its GPU business. Here’s a closer look at some of the recent developments for AMD.

The Fed cut interest rates by 50 basis points earlier this month, 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.

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.  Oracle recently chose AMD’s accelerated computing chips to power its latest supercluster for high-intensity AI workloads, after testing showed that AMD’s GPUs delivered low latency and strong performance at a competitive price. With Nvidia’s GPUs costing upward of $25,000 each, customers like Oracle are actively seeking more cost-effective alternatives, positioning AMD to grow its GPU business for data centers.  To be sure, Nvidia has been the hottest of the AI stocks, rising by roughly 2.5x this year. But did you know that there is a lesser-known AI name that could offer more upside than Nvidia?

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.

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 trades at about 48x consensus 2024 earnings, which is a relatively high multiple. although the ongoing recovery in the PC market and surge in demand from AI applications could justify this. We value AMD stock at about $168 per share, roughly in line with 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 9/30/2024
[2] Cumulative total returns since the end of 2016

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