Advanced Micro Devices (AMD 1.73%) is finally out of the rut it was in thanks to a weak personal computer (PC) market, and that's because of the improving conditions in the PC space and the company's growing prominence in the market for artificial intelligence (AI) chips.
AMD released its third-quarter results on Oct. 31, and the good news is that the chipmaker has finally returned to year-over-year growth following a poor performance in the first half of 2023. Let's look closely at AMD's latest quarterly performance and check why this semiconductor stock could rise once again after pulling back nearly 13% from the 52-week high it hit in mid-June.
AMD has started growing once again
AMD reported Q3 revenue of $5.8 billion, an increase of 4% over the year-ago quarter. The number exceeded the midpoint of the company's guidance of $5.7 billion, which is also what analysts were anticipating it to deliver in Q3. AMD's adjusted earnings also increased 4% year over year to $0.70 per share, ahead of the Wall Street estimate of $0.68 per share.
The biggest reason behind the improvement in AMD's financial performance last quarter was its client processor segment, which houses sales of central processing units (CPUs) used in laptops and desktops. The segment's revenue increased 42% year over year to $1.5 billion, driven primarily by a jump in sales of the company's laptop processors.
Management pointed out on the latest earnings conference call that sales of its Ryzen processors increased "significantly in the quarter as inventory levels in the PC market normalized and demand began returning to seasonal patterns." The good part is that AMD could continue to witness a turnaround in the client processor business as PC sales recover.
According to IDC, PC shipments were down 7.6% year over year in the third quarter of 2023. That was much slower than the year-over-year declines of 13.4% seen in the second quarter and 29% in the first quarter. Given that the market is expected to return to growth next year, AMD should be able to sustain its momentum and deliver stronger results.
AI could turn out to be a big catalyst
A notable takeaway from AMD's latest earnings call was the anticipated ramp-up in sales of its upcoming MI300 data center accelerators that are targeted toward AI workloads. CEO Lisa Su claimed that "multiple large hyperscale customers committed to deploy Instinct MI300 accelerators." The company has already started shipping MI300A chips, and it will start shipping the flagship MI300X AI accelerators to cloud customers in "the coming weeks."
More importantly, Su has quantified the impact of its MI300 family of AI accelerators on the company's business. "Based on the rapid progress we are making with our AI road map execution and purchase commitments from cloud customers, we now expect Data Center GPU revenue to be approximately $400 million in the fourth quarter and exceed $2 billion in 2024 as revenue ramps throughout the year," she said on the earnings call.
AMD was earlier anticipating the MI300 processors to clock $300 million in revenue in the fourth quarter. The upgraded estimate suggests that its AI chips are finding favor among customers. Also, AMD's revenue forecast from AI chips for 2024 indicates that it expects to clock a quarterly revenue run rate of $500 million. However, don't be surprised to see AMD's AI revenue ramping up at a faster pace for a couple of simple reasons.
First, AI chip demand is expected to grow at a faster pace of 26% in 2024 to $67 billion following this year's forecast increase of 21% to $53 billion, according to Gartner.
Second, AMD's rival Nvidia is flooded with orders for its AI processors, and customers are reportedly having to wait for as long as six months to get their hands on its chips. AMD can take advantage of this opportunity and make its mark in the market for AI chips, especially considering that it is reportedly going to corner a nice chunk of supply from its foundry partner.
AMD could step on the gas in 2024
AMD has guided for $6.1 billion in revenue for the fourth quarter, which would be a 9% jump over the prior-year period's figure of $5.6 billion. While that points toward an acceleration from the year-over-year growth AMD delivered in Q3, analysts were expecting a stronger revenue jump to $6.4 billion. Investors, however, should focus on the bigger picture.
Management has already raised its forecast for revenue from AI chips for Q4, so there is a chance that its actual performance may turn out to be better if demand strengthens. Also, AMD's top-line growth is set to take off from 2024 following this year's anticipated drop of 9%.
AMD Revenue Estimates for Next Fiscal Year data by YCharts
Assuming AMD does hit $31 billion in revenue in 2025, as the chart above indicates, and maintains its five-year average price-to-sales ratio of 7.6 at that time, its market capitalization could jump to $235 billion. That would translate into 30% gains from current levels. However, don't be surprised to see AMD delivering a stronger upside thanks to the massive opportunity in AI chips, because of which the market could reward it with a higher sales multiple.
After all, Nvidia trades at an expensive 31 times sales, and AMD may be able to command such a multiple if AI leads to outsize growth in the company's top and bottom lines. All this explains why AMD jumped 4% after its latest earnings report as investors looked past the near-term guidance, and it won't be a bad idea to buy more of this AI stock before it flies higher.
