Advanced Micro Devices (AMD -1.96%) stock set the market ablaze in 2023 with terrific gains of 78% so far this year, but it remains to be seen if the chipmaker's terrific run can continue following its latest quarterly results.
AMD released better-than-expected results for the second quarter of 2023, though a closer look indicates that the company is struggling under the impact of weak personal computer (PC) sales. Also, AMD's muted guidance indicates that it isn't out of the woods yet. Still, investors gave AMD's results a thumbs-up, and the stock jumped.
However, AMD's growth isn't strong enough to justify its lofty valuation. The tech stock is trading at 8.5 times sales, which is well above the S&P 500's price-to-sales ratio of 2.6. So AMD needs to significantly accelerate its growth to justify the expensive valuation, and analysts think the company could deliver the same.
That's evident from AMD stock's median price target of $145 for the next year based on the coverage of 40 analysts, which would translate into a 25% jump from current levels. But can AMD live up to Wall Street's expectations and surge higher over the next year? Let's find out.
AMD is facing headwinds on multiple fronts
AMD's Q2 revenue fell 18% year over year to $5.4 billion, while adjusted earnings dropped at a more alarming rate of 45% to $0.58 per share. The chipmaker's operating margin was down by 10 percentage points as compared to the year-ago period. This sharp decline in AMD's revenue, earnings, and margins can be attributed to weak sales of the company's client and server processors.
More specifically, AMD's client-segment revenue fell a whopping 54% from the prior-year period to $1 billion. PC manufacturers continued to reduce inventories on account of weak demand, leading to a big drop in processor shipments. That wasn't surprising as PC shipments fell 13.4% year over year in Q2, according to International Data Corp. (IDC).
Meanwhile, AMD's data-center revenue was also down 11% over the prior-year period to $1.3 billion on account of weak sales of its Epyc server processors. AMD blamed soft enterprise demand and high inventory levels at cloud customers for this decline. The company's gaming revenue also fell 4% from the year-ago period to $1.6 billion, which means almost all of its key businesses were under stress last quarter.
AMD expects $5.7 billion in revenue in the current quarter at the midpoint of its guidance range. That would translate into a small increase over the year-ago period's figure of $5.6 billion. The chipmaker has also guided for a non-GAAP gross margin of 51%, which would be a slight improvement over the year-ago period's reading of 50%.
While the guidance doesn't seem solid enough to justify AMD's rich valuation, investors are probably happy about the fact that it is about to return to growth in the current quarter. But more importantly, AMD management's comments about the progress it is making in artificial intelligence (AI) chips seem to have given Wall Street another reason to cheer.
Can AI send AMD stock higher in the coming year?
AMD has missed taking advantage of the AI-powered graphics card boom due to the lack of a powerful chip that could compete against Nvidia. However, management's remarks on the company's latest earnings conference call indicate that the chips AMD is developing to tackle AI workloads are gaining interest from customers.
According to AMD CEO Lisa Su, the company has seen a "significant" expansion in AI engagements. She also added:
AI cluster engagements grew by more than seven times sequentially as multiple customers initiated or expanded programs supporting future deployments of Instinct MI250 and MI300 hardware and software at scale.
The company is expected to launch the MI300 data center accelerators this year. If the company manages to convert customer interest into actual sales, its financial performance could improve substantially. We have already seen how Nvidia's fortunes have turned around big time thanks to the robust demand for its data-center graphics cards that are being deployed by several customers to train large-language models. Analysts expect something similar from AMD as the company's growth is expected to pick up from next year.
AMD Revenue Estimates for Current Fiscal Year; data by YCharts.
In the end, it can be said that shares of AMD could keep heading higher over the next year and deliver more upside thanks to a recovery in the PC market and the company's progress in AI. Moreover, with the stock trading at 38 times forward earnings, investors looking to buy a potential AI winner can consider buying AMD since it is currently cheaper than other AI stocks such as Nvidia, which has a forward-earnings multiple of 55.
