Advanced Micro Devices (AMD) or AMD stock has bounced continuously, reflecting shifting sentiment in recent months despite positive earnings. It’s trading well below its 52-week high of $227, and now it appears undervalued, noting growth-adjusted valuation metrics and hardware offerings. To answer the quandary in the title, the current dip may represent an opportunity for investors to get into AMD, so I’m turning bullish on AMD.
AMD Surpassed Expectations
When it comes to earnings, there’s no doubt that AMD is doing well. The company is potentially the biggest competitor to Nvidia (NVDA) in the fast-growing data center/artificial intelligence chip sector, and in its Q2 earnings release, has vastly surpassed market expectations. The Santa Clara company’s revenue reached $5.84 billion, exceeding analysts’ predictions by $120 million, while non-GAAP earnings per share were reported at $0.69, slightly above the estimated $0.68.
During its Q2 release, all eyes were on the company’s performance in the Data Center segment, where AMD reported record revenues of $2.8 billion, marking a 115% year-over-year increase. This growth was largely driven by the strong demand for AMD’s AI offering, including Instinct, EPYC, and Ryzen processors. The company’s Client segment reported a 49% increase in revenue, at $1.5 billion, driven by sales of Ryzen processors.
There’s Still Room for Improvement
It wasn’t all positive in AMD’s Q2 earnings release. AMD’s Gaming segment tanked, with revenue dropping 59% year-over-year to $648 million due to reduced semi-custom revenue. Likewise, the Embedded segment — systems for industrial and commercial applications — saw a 41% decrease, attributed to customers normalizing their inventory levels. So, there’s still room for the company to grow.
Despite these challenges, AMD’s management remains optimistic about future growth, expecting third-quarter revenue to reach approximately $6.7 billion, driven by continued demand in the Data Center and Client segments. CEO Lisa Su emphasized the role of AI and data centers, noting in the earnings call that “our data center GPU (Graphics Processing Unit) business is on a steep growth trajectory as shipments ramp across an expanding set of customers.”
Is AMD Really Competing With Nvidia?
There’s no doubt Nvidia has a huge advantage over its rival, which has over a decade of product mastery, but that doesn’t mean AMD has nothing to offer. In fact, some think it has the upper hand when it comes to hardware. Let’s try to understand AMD’s strategy in its competition with NVDA.
While Su is positive about the company’s trajectory, its growth partially depends on its ability to challenge Nvidia, expand its market share, and capitalize on emerging opportunities in the data center and AI segment.
Despite Nvidia proven methodology, Su’s AMD has taken a different strategic approach. Unlike Nvidia, it doesn’t offer clients a ‘full stack’ of software and predefined libraries. It’s a long way behind here. However, many analysts, including Piper Sandler’s Kumar, say it provides the best-performing chips.
AMD’s AI chips, such as the MI300X, are designed to offer improved performance and efficiency in AI inferencing tasks. AMD claimed that these chips provide 40-60% better latency and throughput than Nvidia’s offerings, making them highly efficient for generative AI applications. However, Nvidia has countered that claim.
Moreover, some analysts have noted that AMD is moving towards a full-stack offering, noting the strategic acquisitions of Silo AI and ZT Systems. These stacks are aimed at the AI data center market and aim to enhance AMD’s EPYC CPUs and Instinct GPUs.
In summary, while AMD is improving its software offering, the company’s main advantage appears to lie in the efficiency of its hardware. This probably means it will struggle to match Nvidia’s market share, but there’s nothing wrong with being number two in this huge market.
Is AMD’s Valuation Justified?
When moving on to the all-important valuation metrics, it becomes much easier to see why I swapped my neutral position into a bullish one.
AMD is unsurprisingly expensive on a near-term basis, trading at 44.5x non-GAAP forward earnings.
Nevertheless, the company is expected to register incredible earnings growth over the medium term. In fact, AMD is expected to grow earnings per share (EPS) at a CAGR of 43% over the next three to five years.
This leads to one of the cheapest price-to-earnings-to-growth (PEG) ratios in the sector — 1.03. That sounds pretty attractive to me.
Is AMD Stock a Buy According to Analysts?
On TipRanks, AMD stock is a Strong Buy based on 28 Buys, six Holds, and zero Sell ratings assigned by analysts in the past three months. The average AMD stock price target is $190.90, implying a 30.43% upside potential.
Bottom Line on AMD Stock
Based on near-term metrics, AMD stock may look expensive, but the projected growth trajectory is impressive. While it will likely play second fiddle to Nvidia in the AI and data center segment for some time, it possesses an impressive and competitive hardware offering that should drive growth as we move forward. Therefore, I am now Bullish on AMD stock.
