Advanced Micro Devices (AMD 0.03%) was one of the many tech firms that shifted its focus to the booming artificial intelligence (AI) market last year.
Since last March, excitement over the company's prospects in the industry has seen its shares soar 154%, rallying investors with a new AI chip and partnerships with tech leaders such as Microsoft and Meta Platforms.
In AMD's fourth quarter of 2023, the company beat Wall Street estimates on revenue and met forecasts for earnings per share. However, weaker-than-expected guidance for 2024's first quarter illustrates why the company's stock is best for long-term-minded investors.
AMD is in transition as it works to catch its rivals, prioritizing the development of graphics processing units (GPUs) and AI. It could be on the brink of major gains, and you won't want to miss out.
Here's why AMD is a screaming buy right now.
Pivoting toward the $200 billion AI market
The AI market exploded last year, hitting a valuation nearing $200 billion. Data from Grand View Research shows the industry is projected to expand at a compound annual growth rate of 37% through 2030, which would see it hit nearly $2 trillion by the end of the decade.
Chipmaker Nvidia became a Wall Street darling last year as it snapped up an estimated 80% to 95% market share in AI chips alongside soaring earnings. However, AMD is moving to challenge its rival and take its slice of the budding market.
NASDAQ: AMD
Key Data Points
Last December, the company unveiled its new MI300X AI graphics processing unit (GPU). The chip has been designed to compete directly with Nvidia's offerings and has already caught the attention of some of tech's most prominent players.
In November 2023, Microsoft announced Azure would become the first cloud platform to use AMD's MI300X to optimize AI capabilities. Microsoft has a close partnership with ChatGPT developer OpenAI, making the company a powerful ally for AMD. An agreement with Meta -- which is poised to use the new chips as well -- also helps make AMD's future in AI look bright.
Moreover, AMD isn't banking solely on stealing market share from Nvidia in GPUs. AMD seeks to lead its own space within AI by doubling down on AI-powered PCs. According to research firm IDC, PC shipments are projected to see a major boost this year, with AI integration serving as a key catalyst. And a Canalys report predicts that 60% of all PCs shipped in 2027 will be AI-enabled.
Earnings-per-share estimates suggest AMD's stock is too good to ignore
AMD is on a promising growth trajectory in AI. However, it will take time for its heavy investment in the market to reflect in its earnings.
In its fourth quarter of 2023, AMD's revenue rose 10% year over year to $6 billion, beating analysts' expectations by about $60 million. The company's AI-focused data center segment posted revenue growth of 38%. Meanwhile, improvements in the PC market boosted AMD's client segment by 65% year over year.
Earnings were positive. However, it wasn't enough to quell investors' concern over weaker-than-expected guidance. AMD expects to reach $5.4 billion in sales in the first quarter, plus or minus $300 million, while Wall Street estimates $5.7 billion.
Sales of central processing units (CPUs) are slowing as GPU demand rises. AMD is experiencing a transition as it shifts its focus along with market trends. Over the long term, GPU sales have the potential to outpace CPU losses.
AMD has a solid outlook over the long term, and earnings-per-share (EPS) estimates seem to support this.
Data by YCharts
The table above shows AMD's earnings could hit just above $7 per share over the next two fiscal years. Multiplying this figure by the company's forward price-to-earnings ratio of 55 yields a stock price of $396.
Considering its current position, these projections would see AMD's stock rise 98% by its fiscal-year 2026.
Alongside an expanding position in AI, AMD looks like a no-brainer buy right now.
