Is AMD Stock a Buy Now?

AMD (AMD 1.73%) posted its third-quarter report on Oct. 31. The chipmaker's revenue rose 4% year over year to $5.8 billion and exceeded analysts' expectations by $110 million. Its adjusted earnings also grew 4% to $0.70 per share and cleared the consensus forecast by $0.02.

That marked the first time AMD's revenue and adjusted earning per share (EPS) grew in tandem since the second quarter of 2022. Does that earnings beat imply its cyclical slowdown is finally over, and it's the right time to buy its stock?

Image source: Getty Images.

Reviewing the key numbers

During the third quarter, AMD generated 28% of its revenue from its data center segment, which sells its Epyc CPUs, Instinct server GPUs, and adaptive system on chips (SoCs) for servers. Its revenue came in flat year over year as its sluggish sales of adaptive SoCs offset its stronger sales of CPUs and GPUs.

The client segment, which sells its Ryzen CPUs, grew 42% year over year and accounted for 26% of its top line. Its growth was mainly driven by brisk sales of its mobile Ryzen CPUs for laptops and hybrid devices. The gaming segment, which sells its Radeon GPUs for gaming PCs and semi-custom SoCs for gaming consoles, accounted for another 26% of its top line and posted a year-over-year revenue decline of 8%. Its cyclically slower sales of console SoCs offset its stronger sales of Radeon GPUs for PCs.

The remaining 21% of AMD's revenue came from its embedded segment, which was expanded significantly through its acquisition of the programmable chipmaker Xilinx last February. The segment's revenue dipped 5% year over year as the macro headwinds throttled the growth of the communications market.

Is AMD's cyclical slowdown finally over?

AMD's growth rates indicate its PC market is stabilizing, but its non-PC markets still face some near-term challenges. During the conference call, CEO Lisa Su said, "inventory levels in the PC market normalized and demand began returning to seasonal patterns," but she noted that the cloud market was "mixed," and the enterprise market stayed "soft."

Data source: AMD. YOY = Year-over-year.

Nevertheless, AMD's strengths clearly offset its weaknesses as its revenue grew year over year for the first time in three quarters. Its adjusted gross margin also expanded sequentially and year over year as its adjusted EPS rose for the first time in five quarters. Its adjusted operating margin dipped year over year, but that was mainly due to higher R&D investments in its AI-oriented Instinct GPUs for data centers.

For the fourth quarter, AMD expects its revenue to grow about 9% year over year as its adjusted gross margin expands to approximately 51.5%. That acceleration, which can also be clearly seen in its larger rival Intel's latest earnings report, indicates the PC market has finally reached its cyclical trough.

Other tailwinds could also kick in as the broader PC market recovers. AMD expects to ramp up its production of its Instinct GPUs in the fourth quarter to challenge Nvidia in the artificial intelligence (AI) market, and its Epyc CPUs could continue to chip away at Intel's Xeon processors in the data center CPU market.

But mind the unpredictable challenges

Analysts expect AMD's revenue and adjusted EPS to decline 9% and 26%, respectively, in 2023. But in 2024, they expect its revenue and adjusted EPS to grow 21% and 51%, respectively, as a new growth cycle kicks off. Based on those expectations, AMD's stock still looks reasonably valued at 24 times forward earnings.

But Nvidia could still face some unpredictable challenges. Intel's newest Meteor Lake mobile chips could finally reverse its years of market share losses to AMD in the laptop market, while AMD's Radeon GPUs could struggle to keep pace with the newest Nvidia GeForce GPUs. The Biden Administration's latest export curbs on advanced AI chip sales to China could also curb its sales of Instinct GPUs. Lastly, Intel's commitment to catching up to Taiwan Semiconductor Manufacturing Company in the process race could also enable it to finally produce smaller, denser, and more power-efficient chips than AMD.

Is it the right time to buy AMD stock?

AMD's stock has already rallied roughly 70% this year in anticipation of the PC market's eventual turnaround; however, it also remains nearly 35% below its all-time high. Its valuations still seem reasonable, it has plenty of irons in the fire, and its core growth engines are warming up again. AMD remains an underdog in CPUs and GPUs, but it's repeatedly proven that it can keep pace with Intel and Nvidia, respectively, in both markets. In short, I believe investors can still buy AMD's stock today to profit from the semiconductor market's cyclical recovery.