This has been a forgettable year for Advanced Micro Devices (AMD 3.83%) investors. Shares of the semiconductor specialist are down 4% so far in 2024, while the PHLX Semiconductor Sector index has recorded impressive gains of almost 20% as of this writing.
More bad news was in the offing for AMD investors when the company released third-quarter results on Oct. 29. Though it reported healthy year-over-year growth in revenue and earnings, Wall Street was unimpressed by the company's progress in the artificial intelligence (AI) chip market. A weaker-than-expected guidance didn't help matters either, as AMD stock tumbled over 10% following the release of its earnings.
NASDAQ: AMD
Key Data Points
However, a closer look at AMD's quarterly report indicates that the sell-off could be overdone. This could be an opportunity for savvy investors to buy the stock, as it may be able to deliver a much-improved performance in 2025. Let's look at the reasons why that may be the case.
AMD's results were solid
AMD's Q3 revenue increased 18% year over year to $6.8 billion, while adjusted earnings per share shot up 31% from the same quarter last year to $0.92 per share. The company's bottom line matched consensus estimates, while its revenue was higher than Wall Street's expectation of $6.71 billion.
AMD reported a record $3.5 billion in data center revenue last quarter, up 122% from the year-ago period. The company attributed this impressive growth to the strong demand for its Instinct series of data center graphics processing units (GPUs) that are being deployed in AI servers. It is worth noting that AMD is now expecting to finish 2024 with at least $5 billion in data center GPU revenue, up from its earlier forecast of $4.5 billion issued in July.
More importantly, AMD had originally guided for $2 billion in data center GPU revenue when the year began, indicating that it has been gradually gaining ground in the lucrative AI chip market. AMD's AI chip revenue estimates headed higher as the year has progressed because of the adoption of its MI300 series of AI accelerators by the likes of Microsoft and Meta Platforms. Other cloud infrastructure providers such as Oracle have also announced the deployment of AMD's MI300X data center GPUs.
AMD management also pointed out that it is witnessing strong interest in its recently launched MI325X GPU, and that's not surprising. Moreover, the company will continue to push the envelope on the product development front annually. It expects to launch its next-generation MI350 series chips in the second half of 2025, followed by the MI400 family in 2026.
There is no doubt that AMD's data center GPU business is much smaller when compared to Nvidia's, but the good part is that there is room for more than one player in this market. After all, AMD expects that the market for AI GPUs could be worth a whopping $500 billion in 2028, and even a 10% share of this market will significantly increase the size of the company's data center business.
AMD has generated $8.7 billion worth of data center chips in the first nine months of 2024, which points toward an annual revenue run rate of $11.6 billion. Of that, around $5 billion would be from sales of AI GPUs as per the company's estimates, while the rest would be from sales of its Epyc server central processing units (CPUs).
So, a 10% share of the AI GPU market could help AMD's revenue from this segment jump by 10x over the next four years and supercharge the company's growth in the process. But at the same time, investors should note that AI GPUs aren't the only way AMD is going to benefit from the proliferation of AI.
The company's Epyc server CPUs are also in demand from cloud service providers to tackle AI workloads. AMD says out that its server CPUs "are deployed at scale to power many of the most important services, including Office 365, Facebook, Teams, Salesforce, SAP, Zoom, Uber, Netflix and many more." Even better, management claims that server manufacturers are developing more than 130 enterprise platforms using its newly launched 5th-generation Epyc server CPUs.
That isn't surprising considering that AMD's new Epyc processors are capable of powering AI instances in the cloud, with both Alphabet and Meta deploying these processors for this purpose. Futurum Intelligence says that CPUs control an estimated 20% of the AI chip market right now, and they are expected to keep playing a central role in this space over the next five years. Futurum predicts that sales of CPUs used in AI servers could hit $26 billion in 2028 as compared to $7.7 billion last year, suggesting that AMD has a solid incremental revenue growth opportunity in this space.
The guidance points toward better times ahead
As a result, AMD is expecting its revenue growth to accelerate in the current quarter. The company guided for $7.5 billion in revenue in the current quarter at the midpoint of its forecast range. Though that's a shade below the consensus analyst estimate of $7.55 billion, the guidance indicates AMD's revenue is set to jump 22% year over year. That would be an improvement over the 18% growth AMD reported last quarter.
Additionally, AMD's non-GAAP gross margin guidance of 54% points toward an improvement over the year-ago period's reading of 51%. It won't be surprising to see a nice increase in the company's earnings as well. Not surprisingly, analysts are expecting a big bump of 53% in AMD's earnings next year.
AMD EPS Estimates for Current Fiscal Year data by YCharts.
The market could reward this sharp increase in AMD's earnings with solid gains next year. That's why it would be a good idea to buy this semiconductor stock right now. It's trading at just 28 times forward earnings, which is lower than the Nasdaq-100's forward earnings multiple of 30.4 (using the index as a proxy for tech stocks).
