The past year has been terrible for Advanced Micro Devices (AMD 3.46%) investors as shares of the chipmaker have crashed 50% thanks to multiple headwinds that include the broader stock market sell-off owing to a hawkish Federal Reserve, slowing semiconductor demand, and concerns that the economy may be headed for a recession in 2023. However, Wall Street is optimistic about the stock's direction over the coming year.
AMD stock carries a price target of $87.50 for the next 12 months as per a consensus estimate of 38 analysts. That points toward a 28% jump in AMD's stock over the next year, but will the chipmaker be able to live up to Wall Street's expectations and soar? Or will the semiconductor market's weakness catch up with AMD and send the stock lower? Let's try to find out.
NASDAQ: AMD
Key Data Points
These headwinds could weigh on AMD over the next year
According to the guidance AMD issued in November 2022, the company's 2022 revenue is expected to increase 43% for the year to $23.5 billion. However, the company's growth is expected to slow down remarkably in 2023, with revenue expected to increase only 6%.
Analysts anticipate AMD to finish 2023 with $24.9 billion in revenue, along with a 4% increase in earnings per share to $3.65. It is not surprising to see why analysts anticipate a big slowdown at AMD this year. First, sales of personal computers (PCs) are expected to remain subdued this year, which will impact sales of AMD's client processors and graphics cards.
The company gets a nice chunk of revenue from selling CPUs (central processing units) that power PCs. More specifically, the client segment produced 19% of its top line in the third quarter of 2022, with revenue from this business declining 40% year over year owing to weak PC demand. The 2.6% decline in PC and tablet sales that's estimated for 2023 suggests that OEMs (original equipment manufacturers) may not be looking to restock CPU inventories anytime soon.
Not surprisingly, Taiwan-based CPU and graphics card OEMs anticipate a 50% sequential decline in sales in the first quarter of 2023. With sales of PCs expected to pick up only beginning in 2024, AMD's processors and graphics cards businesses are likely to remain under pressure until the recovery begins. At the same time, AMD is losing market share in the graphics card space to Intel, which is another reason to be worried about the former's PC-related businesses.
So, AMD will have to contend with potential speedbumps in the PC business over the next year, but the good part is that other catalysts could help it deliver a stronger-than-expected performance.
AMD has a few solid catalysts ahead
It is worth noting that AMD's gaming segment revenue increased 14% year over year in the third quarter of 2022 to $1.6 billion -- accounting for 28% of its top line -- despite the company's receding market share in graphics cards. The year-over-year growth was driven by strong sales of AMD's semi-custom chips that are used in gaming consoles from Sony, Microsoft, and Valve.
The good part is that gaming console sales are expected to increase over the next year. Sony, for instance, is expected to manufacture 30.5 million units of the PlayStation 5 console between March 2023 and March 2024. That would be a big jump over the 18 million consoles that the Japanese giant is expected to ship in the current fiscal year that ends in March.
Meanwhile, shipments of Microsoft's Xbox consoles are expected to remain steady in 2023. The installed base of the company's consoles could grow by 10.8 million units this year as compared to last year's growth of 10.2 million units. So, AMD's gaming business could enjoy another year of growth thanks to the company's presence in the console space.
On the other hand, the data center business could enjoy another solid year given the market-share gains that AMD is clocking. The company's data center revenue was up 45% year over year in the third quarter last year to $1.6 billion, as sales of its Epyc server processors increased at Intel's expense. Server processor shipments are expected to increase by 5% this year following a 6.4% jump in 2022. AMD's share of this market is expected to increase by two percentage points this year to 17%.
Additionally, the company's entry into the market for field-programmable gate arrays (FPGAs) with the acquisition of Xilinx last year has unlocked another multibillion-dollar opportunity for AMD to tap. Sales of FPGAs that are used in data centers and other applications are expected to nearly double by 2027, clocking a compound annual growth rate of over 14%.
All this indicates that AMD has some notable growth drivers that could help it do well and grow at a faster pace over the next year compared to what analysts' expectations. As such, it won't be surprising to see the stock soar over the next year after a disappointing 2022 and get close to Wall Street's price target. This is especially possible considering that a bull market may be on its way.
What should investors do?
Investors who have held AMD stock during the 2022 downturn can consider holding on to the chipmaker in anticipation of a turnaround or even add to their position in case the stock dips due to the PC market's weakness.
Those who don't own AMD stock yet can also think of taking advantage of any declines in the company's share price and consider buying the stock at a relatively cheaper valuation. After all, AMD is trading at a rich 41 times trailing earnings despite its steep decline in the past year. Accumulating shares of AMD on the cheap could turn out to be a smart move, as this semiconductor stock has multiple tailwinds that could lead to a healthy upside in the coming year and beyond.
