The development of artificial intelligence (AI) happens mostly in large, centralized data centers filled with powerful graphics processing units (GPUs). Nvidia remains the go-to provider of those chips, and its H100 GPU was responsible for an impressive 217% increase in the company's data center revenue in its most recent fiscal year.
However, competition is coming. Advanced Micro Devices (AMD 1.14%) launched its own lineup of data center GPUs designed for processing AI workloads, and it received strong demand from many of the same customers that fueled Nvidia's growth. Plus, AMD took an early lead in a different area of the AI chip space that is already yielding incredible financial rewards.
According to The Wall Street Journal, a clear majority of analysts on Wall Street gives AMD stock the highest possible buy rating, and here's why investors may want to follow their lead.
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AMD is chasing Nvidia in the data center, but leading in another major area
AMD launched its MI300 series of data center chips last year, which come in two configurations. The MI300X is a GPU designed to compete with Nvidia's H100, and the MI300A combines GPU and CPU hardware to create an even more powerful accelerated processing unit (APU).
During a conference call with investors for the first quarter of 2024 (ended March 31), AMD CEO Lisa Su said more than 100 enterprise and AI customers were already deploying the MI300X, including some of Nvidia's most prized customers like Microsoft, Meta Platforms, and Oracle.
Su also said many MI300X customers were seeing superior performance compared to their H100 installations, and although Nvidia is already shipping its new, more advanced H200 GPU, this is a great starting point for AMD to build upon. The MI300 has already become the fastest-ramping platform in the company's history, surpassing $1 billion in sales within just six months.
But AI is quickly making its way to the edge, which means the computers and devices we use every day will be capable of processing some of the workloads typically reserved for the data center. It will lead to a faster, more convenient experience when using generative AI chatbots like ChatGPT to create content because queries won't have to bounce to and from centralized infrastructure.
In fact, AMD views AI as the biggest inflection point for personal computing since the internet.
AMD's Ryzen AI chips are the go-to choice for leading desktop and notebook manufacturers like Asus, Acer, Dell, and HP Inc. In the previous quarter, AMD told investors it had a market share of around 90% in this segment, with millions of computers having already shipped with Ryzen AI chips. So, while AMD is chasing Nvidia in the data center, it appears to have an early lead in AI's next frontier.
Incredible progress lies beneath the surface of AMD's modest Q1 revenue growth
AMD's Q1 revenue came in at $5.5 billion, which represented an increase of just 2% from the year-ago period -- not exactly a groundbreaking result for a chipmaker chasing down a giant like Nvidia. But the headline number doesn't tell the whole story.
AMD's data center revenue, specifically, came in at a record high of $2.3 billion, which was a whopping 80% jump year over year. Of course, it was mostly attributable to the MI300 series, and management now thinks data center GPU sales could exceed $4 billion during 2024 (up from a forecast of $3.5 billion just three months ago).
The company's Client segment, which is home to the Ryzen AI series of PC chips, delivered $1.4 billion in revenue, which was an 85% increase from the year-ago period. As I mentioned earlier, millions of computers have already shipped with Ryzen AI chips. However, AMD is gearing up to release its next-generation of hardware (code-named Strix), which is set to deliver substantial improvements in performance and efficiency, and the company says it's already seeing high levels of interest. Therefore, Client segment momentum should continue.
The reason AMD's headline revenue number only grew by 2% is because its two other segments saw dramatic declines. Gaming revenue was down 48%, due in part to declining demand for semi-custom chips, which power consoles like Sony's PlayStation 5 and Microsoft's Xbox.
Revenue from the embedded segment fell 46%. This division is home to AMD's adaptive computing projects, which are supported by the company's acquisition of Xilinx in 2022. Unlike regular chips, adaptive chips can be upgraded in a live environment to increase their performance, so AMD is eyeing a number of opportunities for this hardware in the AI space. For now, customer inventories remain high, but AMD says revenue should recover in the second half of 2024.
Wall Street is very bullish on AMD stock
The Wall Street Journal tracks 49 analysts covering AMD stock, and 31 of them have given it the highest possible buy rating. A further eight are in the overweight (bullish) camp, while nine recommend holding. A lone analyst is in the underweight (bearish) camp, but none recommend selling.
The analysts have an average price target that points to a 37% upside from where the stock trades today, but as investors have seen with Nvidia over the past year, AMD could blow the doors off that number if its data center revenue continues to accelerate.
The caveat is AMD's current valuation. Based on the company's $2.67 in non-GAAP (adjusted) earnings per share on a trailing-12-month basis and its current stock price of $144.87, it trades at a price-to-earnings (P/E) ratio of 54.2. That is quite rich compared to the 29.6 P/E ratio of the Nasdaq-100 index, and it's approaching Nvidia's P/E of 63.8 -- except Nvidia is already delivering the growth to support its premium valuation.
With that said, analysts expect AMD will deliver $3.64 in total earnings during 2024, which places the stock at a forward P/E ratio of 39.8. Then, in 2025, they forecast significant growth to $5.53 in earnings, representing a forward P/E ratio of just 26.2. In other words, AMD's current stock price appears much cheaper the further into the future investors are willing to look.
Therefore, as long as investors maintain a time horizon of at least a couple of years, following Wall Street's lead and buying AMD stock today could be very rewarding.
