Steering Misses, However AMD Delivers The place It Counts

Advanced Micro Devices stock (NASDAQ: AMD) inventory dropped about 13% over the previous two buying and selling days, following its Q3 earnings report, throughout which the corporate supplied barely softer-than-expected steerage for the upcoming quarter. AMD forecasts This autumn revenues between $7.2 billion and $7.8 billion, which means that the midpoint falls barely wanting the $7.55 billion consensus estimate. Regardless of this, we predict that AMD delivered a powerful efficiency the place it actually mattered. Each earnings and revenues got here in forward of expectations, pushed by sturdy demand for AI chips. Notably, the info heart enterprise – which is the corporate’s most intently watched section – achieved $3.5 billion in gross sales, a major leap from $1.59 billion in Q3 2023, and properly above forecasts. AMD additionally raised its outlook for GPU gross sales but once more, now projecting over $5 billion in data-center AI GPU income for 2024, up from $4.5 billion in July. See our evaluation AMD Stock: The Road To $300

Regardless of the latest decline, AMD inventory has fared fairly properly over the past 4-year interval, though, the efficiency has been something however regular. Returns for the inventory had been 57% in 2021, -55% in 2022, and 128% in 2023. In distinction, the Trefis High Quality (HQ) Portfolio, with a group of 30 shares, is significantly much less unstable. And it has outperformed the S&P 500 annually over the identical interval. Why is that? As a gaggle, HQ Portfolio shares supplied higher returns with much less threat versus the benchmark index; much less of a roller-coaster experience as evident in HQ Portfolio efficiency metrics.

AMD continues to be an enormous beneficiary of the generative AI development, as GPUs turn out to be the go-to chips for AI workloads. Whereas AMD was initially targeted on GPU for gaming and design, it has shortly pivoted to chips geared toward giant language mannequin coaching and inference for generative AI. AMD’s product lineup additionally seems to be good. It lately unveiled its Intuition MI325X chips, which is able to go head-to-head towards Nvidia’s Blackwell chips. Though rival Nvidia (NASDAQ:NVDA) has had a head begin within the AI-GPU house and has constructed a strong software program ecosystem round its merchandise, AMD is specializing in areas the place it may possibly win and seize market share. The corporate lately previewed the CDNA 4-powered  MI350 GPU sequence, anticipated to launch in late 2025. The MI350 is projected to supply 35x higher inference efficiency than its CDNA 3-powered predecessor.

Inference – the method of creating predictions or choices based mostly on educated AI fashions – will probably be more and more essential because the broader AI trade shifts from coaching giant language fashions to deploying them for finish use. AMD has additionally been positioning its AI chips as being extra aggressive to be used circumstances the place fashions are used for content material creation or forecasting. This might show advantageous for the corporate, as AI fashions are more and more turning into multimodal – working with speech, pictures, video, and 3D – which requires far more processing energy.

Prospects additionally seem to love the path AMD is taking with its product roadmap. Oracle lately selected AMD’s accelerated computing chips to energy its newest supercluster for high-intensity AI workloads, after testing confirmed that AMD’s GPUs delivered low latency and powerful efficiency at a aggressive worth. With Nvidia’s GPUs costing upward of $25,000 every, clients like Oracle are actively in search of less expensive options, positioning AMD to develop its GPU enterprise for knowledge facilities.  To make sure, Nvidia has been the most well liked of the AI shares, rising by roughly 2.5x this 12 months. Can Fed Price Lower Take Nvidia Inventory To $200?

AMD’s adjusted gross margins are on an enhancing trajectory – they grew from ranges of about 50% in Q3 2023 to 53% in Q3 2024 as the corporate sees higher economies of scale and a extra favorable product combine skewed towards complicated knowledge heart merchandise. In distinction, margins stood at about 40% ranges in 2019. Margins are prone to development nonetheless larger to ranges of about 55%, as AMD sees larger GPU gross sales with larger economies of scale enhancing its fastened price absorption. Given the booming demand for AI functions and the necessity for options to market chief Nvidia, AMD’s AI-related chip gross sales will possible surpass earlier estimates.

AMD trades at about 46x consensus 2024 earnings. Whereas this a number of would possibly seem excessive, it’s justified by the continued restoration within the PC market and a surge in demand for AI functions. Furthermore, the start of financial easing by the U.S. Fed may additionally profit AMD. Decrease rates of interest may cut back financing prices for builders of huge knowledge facilities, doubtlessly driving up capital spending within the house, and serving to gamers like AMD which promote CPUs and GPUs for servers. We worth AMD inventory at about $160 per share, about 10% above the present market worth.   See our evaluation on AMD Valuation: Is AMD Inventory Costly Or Low-cost? for extra particulars on what’s driving our worth estimate for AMD. Additionally, take a look at our evaluation of AMD Income for extra particulars on the corporate’s key income streams.

[1] Returns as of 11/1/2024
[2] Cumulative whole returns because the finish of 2016

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The views and opinions expressed herein are the views and opinions of the creator and don’t essentially replicate these of Nasdaq, Inc.