Share prices of Advanced Micro Devices (AMD 1.26%) soared in anticipation of a second wave of artificial intelligence (AI) spending in 2024. The chipmaker actually provided cautious overall guidance in its fourth-quarter earnings report, but investors are narrowing their focus to the news about the company's new Instinct MI300 chips.
And perhaps for good reason. CEO Lisa Su just let investors know that the company now expects significantly more revenue from AI in the coming year than it forecasted previously.
But is that really enough of a reason to buy AMD stock now?
A 75% revenue upgrade, with more upside coming?
When the third-quarter report came out in late October, Su and her management team said they expected data center AI revenue (specifically from computing accelerators like the MI300 GPU) to be $2 billion in 2024. But that data center sales segment ended up doing about $400 million in sales in Q4 2023 alone (or $1.6 billion on an annualized basis), so an upgrade to guidance for this year was necessary.
On the Q4 earnings call last week, Su said:
Based on the strong customer pull and expanded engagements, we now expect data center GPU revenue to grow sequentially in the first quarter and exceed $3.5 billion in 2024. We have also made significant progress with our supply chain partners and have secured additional capacity to support upside demand.
In other words, AMD just increased its AI chip sales expectations for 2024 by 75%. More upside is possible, as indicated by the comment that AMD has secured more manufacturing capacity from partners (like Taiwan Semiconductor Manufacturing) should its customers demand more AI chips.
Is AI the top reason to buy the stock?
All of this is exciting for AMD as it tries to capture a bit of Nvidia's thunder. But bear in mind that AMD isn't just a bet on data center AI. The other part of AMD's data center business for non-AI applications is still finding its footing again after a year-plus of soft market demand.
Historically, data center chips have been a small revenue segment for AMD. Its "client" segment (PCs and laptops) and its "gaming" segment (especially video game consoles like Sony's Playstation and Microsoft's Xbox) have hauled in most of the sales. The client segment is expected to enjoy a big rebound in sales and profitability this year, while gaming is anticipated to endure a sizable decline.
In all, AMD is expecting modest overall growth in the coming year. At the midpoint of its guidance range, revenue is expected to be flat year over year in Q1 2024 at $5.4 billion. AI chips will move the needle in 2024, but perhaps not to the extent that some investors think.
Why I'm still optimistic about AMD
As I've argued in past write-ups in recent months, the real reason to be optimistic about AMD stock is the coming revival of demand in the client segment, which will bring with it a resumption of profit margin expansion. For reference, AMD's client segment operating income profit margin was just 3.8% in Q4 2023, but that was a big improvement from the 16.8% operating loss margin a year prior. AMD overall may not put up the blistering growth rates that its AI-specific segment will report, but that's OK. If its operating profit margins recover and resume a growth trajectory, AMD will be in good shape.
Much is riding on these business improvements, though. AMD stock now trades at more than 30 times its one-year forward expected earnings per share. I'm optimistic Su and her leadership team can execute on the big opportunities ahead of them, but AMD's data center AI business alone will not be enough to make this top semiconductor stock a buy for 2024.
