Advanced Micro Devices (AMD +0.05%) posted its second-quarter report on July 30. Revenue rose 9% year over year to $5.84 billion, beating analysts' estimates by $114 million, as adjusted earnings per share (EPS) grew 19% to $0.69 and cleared expectations by a penny.
The chipmaker's stock rallied after its earnings beat, and it's risen 26% over the past 12 months as the Nasdaq Composite advanced 23%. Let's see why AMD stayed ahead of the market, and if it can maintain that momentum for the next 12 months.
Image source: Getty Images.
Understanding AMD's advantages
AMD is the world's second-largest supplier of x86 CPUs for PCs and servers. It controls 33.5% of that market, according to PassMark Software, while Intel holds a 63.5% share. But AMD only controls 12% of the discrete GPU market, according to JPR, putting it in a distant second behind Nvidia's 88% share.
NASDAQ: AMD
Key Data Points
AMD keeps pace with those two market leaders by selling comparable chips and lower prices. It's been able to produce more advanced chips than Intel over the past few years by outsourcing its production to Taiwan Semiconductor Manufacturing -- which pulled ahead of Intel's foundries in the "process race" to manufacture smaller and denser chips.
In the desktop GPU market, AMD mostly sells cheaper but less power-efficient chips than Nvidia. But in the data center market, AMD's new Instinct MI300 GPUs consume less power than Nvidia's H100 GPUs while delivering comparable performance at a lower price. That makes AMD an appealing option for AI-driven companies that are struggling to secure enough data center GPUs from Nvidia. AMD's acquisition of Xilinx, which develops embedded chips for data centers and other markets, further complemented the expansion of its AI-oriented businesses over the past two years.
AMD also sells custom APUs (accelerated processing units) that merge together CPUs and GPUs on a single die. These chips are mainly used in gaming consoles (including Microsoft's Xbox Series S/X and Sony's PlayStation 5) and notebook computers.
Another quarter of rising revenue and expanding margins
AMD's revenue declined in the first half of 2023 as the PC market cooled off. That deceleration was mainly caused by unfavorable comparisons to the market's growth spurt during the pandemic -- which had been driven by remote work and online classes -- as well as the macro headwinds for consumer spending. But over the past year, AMD's revenue rose again as its adjusted gross and operating margins expanded.
|
Metric |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
(18%) |
4% |
10% |
2% |
9% |
|
Adjusted gross margin |
50% |
51% |
51% |
52% |
53% |
|
Adjusted operating margin |
20% |
22% |
23% |
21% |
22% |
|
Adjusted EPS growth (YOY) |
(45%) |
21% |
12% |
3% |
19% |
Data source: AMD. YOY = year over year.
Most of AMD's growth in the first half of 2024 was driven by its data center segment. Data center revenue (which includes the Instinct GPUs and Epyc CPUs) soared 80% year over year in the first quarter and jumped 115% in the second quarter. AMD's data center chips accounted for 48% of its top line in the second quarter, up from just 24% a year earlier.
That rapid acceleration complemented the stabilization of its client segment, which maintained its momentum against Intel in the PC market with its latest Ryzen 8000 CPUs. The growth of its data center business also offset the decline of its gaming segment, which has been struggling with weak sales of gaming consoles and market share losses to Nvidia in the PC gaming market, as well as the high inventory levels and declining sales of its embedded chips.
What's next for AMD?
For the third quarter, AMD expects revenue to rise 16% year over year as its adjusted gross margin expands to 53.5%. For the full year, analysts expect revenue and adjusted EPS to rise 13% and 29%, respectively. But in 2025, analysts expect AMD's revenue and adjusted EPS to grow 28% and 59%, respectively, as it ramps up its production of new Instinct GPUs, Epyc CPUs, and Ryzen CPUs. That outlook seems bright, but the stock isn't cheap at 42 times forward earnings.
By comparison, Nvidia -- which leads the discrete GPU market, generates most of its revenue from its data center chips, and is growing a lot faster than AMD -- trades at just 45 times forward earnings. So for some investors, it might make more sense to invest in Nvidia as a pure play on the AI market instead of dealing with AMD's slower-growth businesses.
That said, I believe AMD's stock could head higher over the next 12 months if it continues to expand its data center business and stabilize its other segments. It might struggle to outperform Nvidia, but it could easily stay ahead of Intel and other older chipmakers that are struggling to gain footholds in the growing AI market.
