AI Leader NVIDIA (NASDAQ:NVDA) reported strong first-quarter results, computer processor and graphics card maker Advanced Micro Devices (Nasdaq:AMD) fell relatively short of expectations and only just met expectations. Falling stock pricesafter the earnings release. However, investors should keep in mind that NVDA is several quarters ahead of AMD, which has demonstrated impressive growth in AI-driven data center revenues that will ultimately be reflected in margins and earnings. Therefore, I am bullish on AMD stock.
AMD’s weak first-quarter earnings fail to impress investors
April 30, AMD reported first quarter EPS of $0.62.This was in line with analyst expectations. The figure was only 3.33% higher than the $0.60 per share forecast for Q1 fiscal 2023. Q1 revenue increased 2.2% year over year to $5.47 billion, also roughly in line with consensus estimates. Strong Data Center revenue helped offset some weakness in the Embedded and Gaming segments, but overall Q1 results were lackluster.
Importantly, data center revenues remain strong, growing an astounding 80% year-over-year during the quarter, driven by the launch of the latest MI300 AI accelerators, Ryzen, and EPYC processors. Unfortunately, gaming revenues declined 48% year-over-year due to lower sales of gaming chips. Additionally, adjusted gross and operating margins were disappointing at 52% (compared to Nvidia’s 78.4%) and 21%, respectively.
Secondly, AMD’s revenue guidance was in line with market expectations. Total revenue for the second quarter is expected to be around $5.7 billion (+/- $300 million). However, management raised its data center GPU sales outlook, which is now expected to be $4 billion, versus the previous guidance of $3.5 billion. The company’s adjusted gross margins are expected to be around 53%.
AMD’s AI Product Roadmap Shows Great Growth Potential
AMD’s shares have fallen 28% from an all-time high of $227 in March 2024 to around $164 today due to relatively disappointing first-quarter results and concerns about fading demand for AI.
However, investors should keep in mind that AMD is NVDA’s closest competitor, and its GPUs are notoriously cheaper alternatives to NVDA’s. Given that there is a clear gap between demand and supply due to limited manufacturing capacity, the growing popularity of AI creates an opportunity for AMD chips to fill that gap.
For example, MicrosoftNasdaq:MSFTNVDA recently announced that its cloud computing customers using Azure can choose AMD’s MI300 chips along with NVDA’s H100 GPUs, providing customers with an alternative in the face of overall supply constraints or individual client budget constraints. Notably, AMD’s MI300 accelerators, which compete with NVDA’s H100 chips, are 33% cheaper than NVDA’s.
Nvidia currently leads the AI and GPU market with over 80% share, but AMD’s competitive pricing and improved performance could help it gain market share in the long run. It’s worth noting that the MI300 is considered AMD’s fastest growing product in history. Launched just two quarters ago, the product has already crossed the $1 billion sales milestone.
It’s no surprise, therefore, that AMD management has consistently raised its MI300 revenue guidance over the past three quarters, and it’s very likely that trend of increased revenue will continue in the coming quarters.
It is important to note that compared to NVDA, AMD has a more diverse product lineup. NVDA is well known for its powerful GPUs for data centers, while AMD offers a wider range of products, including CPUs for PCs and GPUs for the gaming industry. During the COVID-19 pandemic, the PC market saw a surge in demand. Now, users are once again moving to new PCs with upgraded technology. AMD is a major supplier in the high-end PC market and will undoubtedly benefit from the growing demand for PCs.
Additionally, both NVDA and AMD continue to release their latest products, including accelerators and processors. AMD released its MI300 accelerator in December 2023, while NVDA released its Blackwell GPU in March 2024.
In response to NVDA’s speed of innovation, AMD CEO Lisa Su announced the pace of new product launches each year. Computex Show It was held on June 2nd. The product roadmap is impressive, with new products being launched every year, Revenue and Profit.
Notably, AMD has been consistently making acquisitions to strengthen its data center offerings, for example, acquiring Xilinx in February 2022 and Pensando Systems in May 2022. Moreover, these acquisitions have yet to be fully integrated and, as management has noted, are expected to create a $10 billion cross-selling opportunity. With acquisitions, AMD’s target market continues to grow, increasing from just under $80 billion in fiscal 2020 to $300 billion now.
AMD’s valuation isn’t cheap, but it still seems reasonable.
Surprisingly, AMD trades at a high forward P/E multiple (47x), slightly higher than AI prodigy Nvidia, which trades at a forward P/E of 45x. Why is AMD’s valuation so high despite lagging NVDA’s stellar results? The answer is clear: AMD’s AI growth story is just beginning and it will likely follow in NVDA’s footsteps for the next few years.
Now, let’s consider whether AMD is worth buying at current levels. Wall Street analysts expect AMD’s EPS to be around $5.59 in fiscal 2025 (with around $6.50 expected in fiscal 2026). If AMD maintains the same 47x forward P/E multiple by then, the stock would be worth around $275, or 68% higher than its current price.
In other words, AMD shares are trading at 28 times projected fiscal 2025 EPS, which means they’re 35% cheaper than their five-year average of 43 times.
Therefore, given the strong growth fundamentals in the AI sector, it makes sense to consider buying AMD stock at current levels.
Is Advanced Micro Devices stock a buy according to analysts?
Sentiment among Wall Street analysts is clearly positive towards Advanced Micro Devices stock, with the stock receiving 28 Buy recommendations and 7 Hold recommendations for a consensus rating of “Strong Buy.” The average target price for AMD shares is $191.03. This suggests a potential upside of 16.6% from current levels.
Conclusion: Consider AMD for Long-Term AI Potential
There’s clear demand for AI across a wide range of industries as companies look to build out their own datacenter infrastructure. This means that sales of AI chips, GPUs, and CPUs will continue to grow robustly for at least a few years. AMD’s advancements in AI and datacenter solutions position the company well for future growth, and competitive pricing will help it gain market share over time.
Additionally, AMD has a strong foothold in the PC AI market and will likely continue to gain market share. The impending PC upgrade cycle driven by AI-enabled PCs should accelerate AMD’s revenue and margin growth in the coming quarters. Given my bullish stance, I view the current share price weakness as a buying opportunity.
