Guidance Misses, But AMD Delivers Where It Counts

Advanced Micro Devices stock (NASDAQ: AMD) stock dropped about 13% over the past two trading days, following its Q3 earnings report, during which the company provided slightly softer-than-expected guidance for the upcoming quarter. AMD forecasts Q4 revenues between $7.2 billion and $7.8 billion, meaning that the midpoint falls slightly short of the $7.55 billion consensus estimate. Despite this, we think that AMD delivered a strong performance where it truly mattered. Both earnings and revenues came in ahead of expectations, driven by strong demand for AI chips. Notably, the data center business – which is the company’s most closely watched segment – achieved $3.5 billion in sales, a significant leap from $1.59 billion in Q3 2023, and well above forecasts. AMD also raised its outlook for GPU sales yet again, now projecting over $5 billion in data-center AI GPU revenue for 2024, up from $4.5 billion in July. See our analysis AMD Stock: The Road To $300

Despite the recent decline, AMD stock has fared pretty well over the last 4-year period, although, the performance has been anything but steady. 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.

AMD continues to be a big beneficiary of the generative AI trend, as GPUs become the go-to chips for AI workloads. While AMD was initially focused on GPU for gaming and design, it has quickly pivoted to chips aimed at large language model training and inference for generative AI. AMD’s product lineup also looks good. It recently unveiled its Instinct MI325X chips, which will go head-to-head against Nvidia’s Blackwell chips. Although rival Nvidia (NASDAQ:NVDA) has had a head start in the AI-GPU space and has built a solid software ecosystem around its products, AMD is focusing on areas where it can win and capture market share. The company recently previewed the CDNA 4-powered  MI350 GPU series, expected to launch in late 2025. The MI350 is projected to offer 35x better inference performance than its CDNA 3-powered predecessor.

Inference – the process of making predictions or decisions based on trained AI models – will be increasingly important as the broader AI industry shifts from training large language models to deploying them for end use. AMD has also been positioning its AI chips as being more competitive for use cases where models are used for content creation or forecasting. This could prove advantageous for the company, as AI models are increasingly becoming multimodal – working with speech, images, video, and 3D – which requires much more processing power.

Customers also appear to like the direction AMD is taking with its product roadmap. 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. Can Fed Rate Cut Take Nvidia Stock To $200?

AMD’s adjusted gross margins are on an improving trajectory – they grew from levels of about 50% in Q3 2023 to 53% in Q3 2024 as the company sees better economies of scale and a more favorable product mix skewed toward complex data center products. In contrast, margins stood at about 40% levels in 2019. Margins are likely to trend still higher to levels of about 55%, as AMD sees higher GPU sales with higher economies of scale improving its fixed cost absorption. 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.

AMD trades at about 46x consensus 2024 earnings. While this multiple might appear high, it is justified by the ongoing recovery in the PC market and a surge in demand for AI applications. Moreover, the beginning of monetary easing 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 $160 per share, about 10% 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.

[1] Returns as of 11/1/2024
[2] Cumulative total returns since the end of 2016

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