Investors have piled into Advanced Micro Devices (AMD 2.55%) stock in 2023, driving the shares up 89% year to date. After a temporary pullback over the summer, the stock surged higher following the release of the company's third-quarter financial results.
There are good reasons to be bullish on AMD's growth prospects. It is enjoying solid momentum in sales of central processing units (CPUs). However, mixed results across AMD's business have caused analysts to start reducing growth estimates in the near term.
Here are one green flag and one red flag for the stock as we look ahead to 2024.
Green flag: AMD is winning the CPU battle
AMD primarily competes with Intel in CPUs and Nvidia in graphics processing units (GPUs). Investors have low expectations regarding its ability to beat Nvidia in the GPU market, so that's why AMD's momentum in CPUs is a positive for the stock.
In the third-quarter update, AMD revealed strength across the board in CPUs for enterprise servers and consumer PCs. Data center revenue grew 21% over the second quarter, reflecting strong demand for the fourth-generation EPYC "Genoa" chips for servers.
While AMD noted that enterprise demand remains soft overall, CEO Lisa Su cited Genoa's performance and helping companies save money on cost of ownership as factors driving double-digit growth in enterprise revenue last quarter.
On the consumer side, AMD's Ryzen CPUs have become the chip of choice for PC gamers. Client segment revenue jumped 46% over the previous quarter thanks to strong demand for the Ryzen 7000 series chips.
AMD is receiving great feedback from prospective customers for its next-generation Turing processors and MI300 accelerators for enterprise servers, which could drive more growth in 2024.
Red flag: There are holes in AMD's performance
AMD is not firing on all cylinders. In the third quarter, total revenue increased by just 4% year over year and 8% over the previous quarter. AMD's diversification across several chip products may be its biggest weakness right now as it struggles to catch Nvidia in the GPU market.
AMD's data center segment reported flat growth year over year in the third quarter. The strong growth of EPYC CPUs was offset by a decline in adaptive System-on-Chip (SoC) products.
AMD is also still experiencing weakness in gaming. Strong sales of Radeon gaming GPUs were offset by weakness in sales of processors for video game consoles.
For the fourth quarter, management forecasts total revenue will be up approximately 9% year over year and 5% over the third quarter. The company will need to show accelerating growth next year to justify the stock's relatively higher valuation compared to Nvidia.
Data by YCharts
Analysts have been reducing their growth forecasts for AMD, while hiking estimates for Nvidia. This isn't surprising considering Nvidia continues to blow away Wall Street's expectations, while AMD is still struggling with a soft market across its product portfolio.
AMD may get the ball rolling next year with its new MI300 GPU accelerators designed for AI workloads. But investors are still being asked to pay a premium for a company that is far behind the leader in GPUs. The safest path for investors is to wait for AMD to report better growth after it launches its new AI chips before buying the stock. There is the risk that the MI300 chips don't move the needle as expected, which may limit the stock's performance next year.
