The past three years have been complicated for Advanced Micro Devices (AMD 1.31%) investors. Shares of the chipmaker have remained under pressure due to weakness in the personal computer (PC) market; at the same time, tough competition from rival Nvidia in the gaming and data center graphics cards segments has also dented investor confidence in the stock.
As it turns out, AMD shares have gained 44% over the past three years, underperforming the PHLX Semiconductor Sector index's 56% gains. However, it won't be surprising if the company's fortunes turn around over the next three years.
NASDAQ: AMD
Key Data Points
The PC recovery has created a big tailwind for AMD
PC shipments fell almost 14% in 2023, according to IDC, following a 16.6% decline in 2022. However, the PC market has started to recover over the past few quarters. IDC reports that the PC market recorded 3% year-over-year growth in the second quarter, following a 1.5% jump in Q1. That recovery is likely to get stronger in the future thanks to the growing buzz around artificial intelligence (AI)-enabled PCs.
IDC estimates that annual AI PC shipments could grow from 50 million units in 2024 to 167 million units in 2027. This could pave the way for solid growth in AMD's client processor business, where it has been gaining ground against Intel.
According to Mercury Research, AMD's share of the desktop CPU (central processing unit) market increased to 23% in the second quarter from 19.4% in the same period last year. Its share of notebook CPUs increased to 20.3% in Q2 from 16.5% in the prior-year period. This improving market share and the overall growth in PC volumes resulted in AMD's client revenue rising by 49% year over year to $1.5 billion in the second quarter.
CEO Lisa Su believes that the company is "well positioned for ongoing revenue share gains based on the strength of our leadership portfolio and design win momentum." If AMD continues to win a bigger share of the PC CPU market over the next three years, it could record healthy growth in its client segment.
The data center market presents another lucrative opportunity
AMD's data center business has historically been driven by its Epyc server processors, which compete against Intel's offerings. Just as it has in the client CPU market, AMD has been eating into Intel's dominant position in the server CPU space. It controlled 24.1% of the server CPU market in the second quarter, up from 18.6% in the same quarter last year.
AMD management estimates there will be a total addressable market (TAM) of $42 billion in server CPUs in the long run. The company finished 2023 with data center revenue of $6.5 billion, the majority of which came from sales of server CPUs. More specifically, AMD launched its MI300 line of data center graphics processing units (GPUs) in December last year, and this product line delivered over $400 million in revenue in the fourth quarter.
So, it can be estimated that AMD sold around $6 billion worth of server CPUs last year. Given the size of the addressable opportunity and AMD's growing influence in this space, it won't be surprising to see the company's data center CPU revenue improving considerably in the future. But more importantly, the sharp acceleration that the company is anticipating in sales of its data center GPUs this year is going to kick this segment's growth into a higher gear.
We have already seen that AMD sold around $400 million worth of data center GPUs in Q4 of 2023, which was the quarter during which it launched its MI300 AI accelerators. The chipmaker is anticipating its data center GPU revenue to exceed $4.5 billion in 2024, which would be a jump of more than 10-fold from the prior year.
This suggests that AMD is solidifying its position as the second-largest player in the data center GPU market behind Nvidia. That's not a bad spot to be in, considering that AMD expects the data center AI accelerator market to hit $400 billion in revenue in 2027. This additional catalyst for AMD should ideally give it a major boost and supercharge its growth over the next three years.
Smart acquisitions will strengthen its AI prospects
AMD has been taking steps to ensure that it becomes a key player in the AI market. These include a couple of key acquisitions that were announced in the past couple of months.
In August, AMD completed its acquisition of Silo AI in a deal valued at $665 million. It will now be aiming to offer end-to-end AI solutions to customers thanks to Silo AI's expertise in developing large language models (LLMs). In simpler words, AMD is taking steps toward becoming a complete provider of AI solutions, including software, rather than simply focusing on making hardware.
That's a smart thing to do considering the massive opportunities in the AI software market. And now, AMD has decided to spend $4.9 billion to buy ZT Systems, a company that's known for designing and manufacturing server and storage systems. ZT Systems will become a part of AMD's data center business when the transaction closes in the first half of next year.
AMD intends to divest ZT's server manufacturing division, which seems like a good move considering the low-margin nature of this business. But by retaining ZT's design capabilities, AMD intends to offer complete AI server solutions comprising its Instinct AI GPUs, Epyc server processors, and networking products instead of only selling individual components.
So, AMD intends to become a one-stop shop for companies looking to deploy AI server systems. This strategy could reap rich rewards in the long run considering that Nvidia sells complete server rack systems for as much as $3.8 million depending on configuration, and it is witnessing solid demand for its end-to-end systems because of their faster computing abilities and lower operating costs.
AMD EPS Estimates for Current Fiscal Year data by YCharts.
In the end, it can be concluded that AMD is sitting on stronger growth drivers for the next three years. Not surprisingly, analysts are expecting a sharp acceleration in its earnings from 2023 levels of $2.65 per share.
Based on the company's 2026 earnings forecast, its bottom line is set to increase at a compound annual rate of 40% over the next three years. So investors looking to add an AI stock to their portfolios would do well to buy AMD as it seems poised for stronger gains than it delivered in the past three years.
