Advanced Micro Devices (AMD +18.37%) has faced its share of challenges in 2023, with the stock currently down by nearly 23% from its June highs. A leading chip designer, the company posted a 13.8% year-over-year decline in revenues in the first half of the year, mainly driven by weakness in the personal computing business.
NASDAQ: AMD
Key Data Points
Despite those disappointing sales figures, the narrative has slowly started shifting for the better. The latter half of 2023 is expected to show a promising recovery, especially with Micron claiming that chip inventory levels and pricing bottomed in the second quarter. If true, the market can expect rising demand for CPUs and GPUs in areas such as gaming, data center, and automotive industries. AMD is also gearing up to make its presence felt in the artificial intelligence (AI) GPU market, which AMD management estimates will be worth $150 billion by 2027.
In this context, considering AMD's long-term growth prospects and valuation, let's assess the reasons why it will make sense for retail investors to open a position in AMD and hold it at least for the next three years.
AI GPU market opportunity
The AI GPU market has been growing at a very rapid clip, thanks to robust demand from hyperscale data centers running high-performance computing workloads and complex AI algorithms. Although Nvidia's chips account for more than 90% of the AI GPU market, AMD may soon emerge as the second dominant player in it.
The upcoming launch of AMD's MI300 GPU series (slated to go into production in the fourth quarter) is expected to prove a game-changer for the company. The MI300 boasts the largest memory bandwidth in the semiconductor industry. This makes the chip well suited for AI inferencing workloads, wherein generative AI models are used to analyze and predict from real-time data across use cases. Hence, while Nvidia is a leading presence in the training of generative AI models, AMD can position itself as a force to be reckoned with in the inferencing niche.
AMD is also working to strengthen its software offerings, organically and inorganically. Its Radeon Open Compute (ROCm) open-source software platform, used to program its CPUs and GPUs, has been lately witnessing several performance and feature updates. Its acquisition of leading AI software player Mipsology will also enable the company to effectively program its AI chips for inferencing -- thereby enabling it to provide holistic hardware-software solutions for AI implementations. AMD also acquired Nod.ai, a leader in open-source AI technology, for developing versatile and efficient AI solutions.
AMD's increasing presence in the data center market
AMD has already built a solid presence in the CPU and gaming GPU niches. The company is now focusing on further expanding its presence in the data center chip market, which Allied Market Research estimates will grow annually at a compound average rate of 14.6% over the next decade, from $11.7 billion in 2022 to $45.3 billion in 2032.
AMD's fourth-generation EPYC CPU chips have been making rapid inroads in the data center market thanks to their impressive performance, efficiency, and cost-effectiveness. Built using Taiwan Semiconductor Manufacturing's 5nm manufacturing process, these CPUs have proved exceptional at handling several types of workloads.
AMD ended the first quarter of 2023 with an 18% share of the server CPU market, up by 0.4 percentage points on a sequential basis. The company's successes can partly be attributed to the troubles faced by peer Intel, which was beset by multiple delays in its effort to launch its Sapphire Rapids server chips, which are being built with a 10nm manufacturing process. Originally scheduled to be launched in 2021, Intel managed to introduce the Sapphire Rapids chip only in early 2023.
AMD's data center revenues, however, declined by 5.8% year over year to $2.6 billion in the first half of 2023, mainly due to softer enterprise demand and higher inventory levels of chips with some clients. Despite this, the company is now guiding for flat revenues for its data center segment in 2023 as it anticipates increasing adoption of fourth-generation EPYC processors as well as initial shipments of MI300 GPUs in the fourth quarter, when major AI, high-performance computing, and cloud customers will get early access to them.
Projections
AMD currently trades at a price-to-sales multiple of 7.54, close to its five-year average multiple of 7.56. On average, analysts are projecting its revenues will be $35.3 billion in fiscal 2026, nearly 1.54 times its forecast revenue of $22.8 billion this year. Assuming that AMD's sales multiple holds steady at around its five-year average, the stock seems well positioned to grow by nearly 54% in the next three years.
Considering its focus on its AI opportunities, and its growing presence in the lucrative data center market, AMD seems to present a promising long-term pick for retail investors.
