Advanced Micro Devices (AMD 5.22%) stock has plunged nearly 10% since May 2, with the decline mainly driven by weak second-quarter 2023 guidance. The company posted first-quarter 2023 revenue of $5.4 billion, beating Wall Street expectations by $40 million. However, the positive results weren't enough to outshine underwhelming revenue projections for Q2.
Despite near-term headwinds, AMD continues to be an attractive stock thanks to its prospects in data centers, artificial intelligence (AI), and specialized chips. As a result, a recent dip is a great time to learn more about this semiconductor company, which will likely see its stock soar over the long term.
Here are three things about AMD that smart investors know.
1. A weak Q2 outlook
AMD's Q2 guidance has fallen short of analyst revenue expectations of $5.5 billion, with the company's forecast of $5.3 billion missing by about 4.5%. The weak guidance comes alongside macroeconomic strains that have prompted reduced spending in the PC and cloud markets.
Steep rises in inflation over the last year have burdened the entire tech market, with AMD's client and gaming segments hit the hardest. Consumers have pulled back on discretionary spending, including the company's consumer line of computer components used by millions of PC gamers.
Additionally, slowing data center growth could be another contributor to weak Q2 results, a segment that has previously been a bright spot in AMD's earnings. The company's chips power data centers worldwide, hosting cloud giants like Microsoft's Azure and Alphabet's Google Cloud. While the sector's long-term future remains bright, rising interest rates have forced businesses to slash cloud budgets, stunting growth across the entire industry.
As a result, economic strains may lead to poor Q2 results. However, AMD's stock is still a compelling investment thanks to the long-term prospects of markets like AI and cloud computing.
NASDAQ: AMD
Key Data Points
2. Massive potential in AI
Nvidia seems to have taken the lead in AI for now, with its graphics processing units (GPUs) powering OpenAI's ChatGPT. However, AMD has vast potential in the sector as a leader in GPUs and central processing units (CPUs). Its position as a developer of both components could allow it to better cater to a wide range of AI applications, with its GPUs handling large workloads and its CPUs capable of smaller tasks.
AMD is currently investing big in AI, with its acquisitions of Pensando and Xilinx last year looking promising for its future. Pensando excels in developing and enhancing cloud services. Meanwhile, Xilinx has made a name for itself in the embedded sector, producing CPUs for specialized tasks in markets like aerospace and defense, space, AI, and industrial. These companies have diversified AMD's market reach and strengthened its AI portfolio by enabling it to meet the needs of a wide range of companies.
According to Statista, the AI market is valued at about $208 billion and is projected to hit $1.8 trillion by 2030. As a result, AMD's priority on growing its AI capabilities and chip offerings could offer major gains for investors down the road.
3. A thriving custom chip business
In addition to AI, AMD has become a go-to for tech companies looking for custom chips to power various devices. The company has attained an 83% market share in game console processors by being the exclusive chip supplier to Microsoft's Xbox Series X|S and Sony's PlayStation 5. Its dominance in the space has led the company to supply chips to several handheld gaming devices as well, with some experts suggesting that Nintendo could switch from Nvidia chips to AMD's with its next console.
The tech giant's success in console chips has kept its gaming segment profitable amid PC market declines which have meant decreased consumer GPU sales. In fiscal 2022, AMD's gaming revenue rose 21%, with a marginal year-over-year decline in Q1 2023. The segment would likely have suffered significant losses if not for AMD's lucrative console partnerships.
Despite short-term headwinds, AMD's average 12-month price target of $101 is 24% higher than its current position, proving the company's stock still has a promising outlook. The metric is in line with AMD's price/earnings-to-growth ratio of 0.1, which indicates a projected stock rise is not currently priced into its shares.
With lucrative prospects in AI, the cloud market, and custom chis, AMD stock is an attractive investment for those willing to wait out an economic downturn.
