Advanced Micro Devices (AMD -0.90%) stock sank 7% following its second-quarter 2023 earnings report released on Aug. 1. That was despite reporting better-than-expected numbers and indicating that its personal computer (PC) business has bottomed out.
Even though AMD's guidance for the current quarter suggests that the worst may be behind the company, the stock was hit hard by a broad market selloff on Aug. 2. Moreover, it looks like Wall Street was expecting more from AMD on the artificial intelligence (AI) front, an area where the company has failed to gain traction so far due to the lack of a competitive chip.
AMD's AI accelerators are yet to hit the market, allowing rival Nvidia (NVDA 0.58%) to capture a big chunk of this hot growth opportunity. But savvy investors can use AMD's latest pullback to buy its shares as the chipmaker's AI efforts should help it win big in one key market and supercharge its growth.
AMD's focus on China could be a smart move
There is tremendous demand for AI chips in China, which isn't surprising as the adoption of this technology is set to increase nicely in that market. According to market research firm IDC, the AI market in China is expected to generate $26.4 billion in revenue in 2026 as compared to $12.2 billion last year. This explains why the market for AI hardware is expected to increase to nearly $15 billion in 2026 from $8 billion last year.
This could be a solid opportunity for AMD to give its data center business a nice boost as Chinese customers are struggling to get their hands on AI chips following restrictions imposed by the U.S. Department of Commerce. As a result, the prices of graphics cards from AMD's competitor, Nvidia, are soaring in the Chinese black market.
Reuters reports that Nvidia's A100 data center graphics card is reportedly being sold for $20,000 a unit -- double the original price of the chip. The U.S. government's strategy of restricting sales of powerful AI chips to China has created a supply shortage, forcing customers to pay through their noses to get their hands on one. Also, customers in China are finding it difficult to procure Nvidia's latest generation of H100 data center processors.
AMD is looking to capitalize on this supply shortage of AI chips in the Chinese market. Responding to an analyst's query on the latest earnings conference call, AMD CEO Lisa Su said that she sees "an opportunity to develop product[s] for our customer set in China that is looking for AI solutions, and we'll continue to work in that direction."
Su added that AMD will remain completely compliant with the export controls imposed by the U.S. government. However, it looks like the company is thinking of developing a China-specific chip that it can sell in that market. It is worth noting that Nvidia has already adopted such an approach, launching a couple of chips for the Chinese market over the past year in compliance with the U.S. government's restrictions.
But AI chips continue to remain in short supply in that market, a trend that's expected to continue in 2024 as well. AMD is probably looking to cash in on that opportunity based upon Su's remarks on the latest earnings call, and if it can do so, its data center business could get a nice boost.
Its data center business is about to turn around
AMD struggled in the data center segment last quarter, reporting a year-over-year decline of 11% in revenue to $1.3 billion on account of weak demand from enterprise customers and the ongoing inventory correction at cloud customers. However, the company sees a solid long-term opportunity in this market, pointing out that the market for AI accelerators alone could be worth $150 billion by 2027.
That's why the company has been increasing its AI-related product development. The good part is that its moves could start bearing fruit soon. It witnessed a sevenfold growth in AI engagements last quarter with customers who are looking to deploy its MI250 and MI300 accelerators.
Moreover, the company is set to aggressively ramp up the production of its new AI accelerators in the second half of the year. Management expects this ramp and the company's ongoing AI engagements to translate into significant gains in the data center business in the second half of the year. More specifically, AMD expects its 2023 data center revenue to exceed 2022's figure of $6 billion.
AMD's data center revenue stood at $2.6 billion in the first half of 2023. So the company sees a jump of at least 30% in data center revenue in the second half as compared to the first half of the year. That won't be surprising given the opportunity in China and the AI chip market in general. Nvidia alone isn't able to meet the end-market demand, leading to a shortage of graphics cards capable of tackling AI workloads.
AMD should see a better second half of the year
When combined with the improving conditions in the PC market, AMD may be able to deliver a much stronger performance in the second half of the year following a tepid performance in the first half. The company's revenue has declined 14% in the first six months of 2023 to $10.7 billion, while it has swung to an adjusted loss of $0.07 per share as compared to a profit of $0.81 per share in the prior-year period.
Analysts, however, expect the company to finish the year with $23 billion in revenue, which would be a drop of just 3% over 2022 and points toward a solid recovery over the next six months. As such, AMD investors would do well to hold on to the stock as it seems built for more upside following 80% gains in 2023.
