Will AI Surge Drive A Q3 Beat For AMD Stock?

Advanced Micro Devices stock (NASDAQ: AMD) is expected to publish its Q3 FY’24 results toward the end of October,  reporting on a quarter that is likely to see the company benefit from stronger demand for artificial intelligence chips. We expect AMD revenues to come in at $6.73 billion, marking an increase of 16% compared to last year, while earnings are likely to come in at about 0.92 per share, slightly ahead of consensus estimates, and up 30% year-over-year. See our analysis of Advanced Micro Devices Earnings Preview for a closer look at what to expect when the company publishes its Q3 earnings.

The increase in AMD stock over the last 4-year period has been anything but steady, 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.

Over the last quarter, Q2 2024, sales for the client segment stood at $1.5 billion, up 49% year-over-year driven primarily by AMD Ryzen 8000 Series processors. However, the PC market remained mixed over Q3. Worldwide PC shipments stood at 62.9 million units in Q3, per Gartner, marking a 1.3% year-over-year decrease. AMD’s growth could be a bit better, driven by some market share gains and potential inventory replenishment by vendors following drawdowns seen in 2023. 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 expected to expand meaningfully, driven by the surge in demand for AI-related workloads. Graphics processing units have become the de-facto chips for running AI applications. AMD has launched new chips, such as the MI300X, targeted at large language model training and inference for generative AI workloads. The company now expects data center GPU revenue to exceed $4.5 billion in 2024, up from the $4 billion guided to in April. AI chip sales, reported in AMD’s Data Center segment, soared 115% year over year to $2.8 billion, reflecting a significant increase in AI GPU shipments.

Given the booming demand for AI applications and the need for alternatives to market leader Nvidia, AMD’s AI-related chip sales will likely surpass previous estimates. The stronger revenue base and potentially more favorable product mix should drive AMD’s profits higher. Adjusted gross margins rose 300 basis points over the last quarter to 53% and AMD is guiding for margins of approximately 53.5% for Q3.  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?

AMD trades at about 46x consensus 2024 earnings. While this is a high multiple, it is justified by the ongoing recovery in the PC market and a surge in demand from AI applications could justify this to an extent. Moreover, the recent cut in benchmark interest rates by the U.S. Fed could also benefit AMD. Lower interest rates could 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. We value AMD stock at about $168 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 10/17/2024
[2] Cumulative total returns since the end of 2016

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