AMD (AMD 0.03%) was once considered a struggling underdog chipmaker that trailed behind Intel and Nvidia in the x86 CPU (central processing unit) and discrete graphics processing unit (GPU) markets, respectively. But over the past ten years, its stock soared about 5,110% as it gained ground against Intel and kept pace with Nvidia.
That rally would have turned a $20,000 investment into more than $1 million. But over the past 12 months, its stock stayed nearly flat as the sluggish growth of the PC market offset the expansion of its higher-growth data center business. Does that breather represent a golden buying opportunity for long-term investors?
Image source: Getty Images.
Why did AMD outperform Intel over the past decade?
Lisa Su, who took over as AMD's CEO in 2014, turned around the chipmaker with three main strategies. First, AMD rolled out more custom accelerated processing units (APUs) which merged together CPUs and GPUs on a single die. It sold a lot of those chips to gaming console makers like Sony and Microsoft, and that growth fed the expansion of its enterprise, embedded, and semi-custom (EESC) business while generating more cash for its core CPU and GPU businesses.
Second, Su drove AMD to redesign its CPUs to address the disappointing performance of its previous generation of Bulldozer chips. Unlike Intel, which still manufactured most of its chips at its own first-party foundries, AMD outsourced the production of its most advanced chips to TSMC. That "fabless" strategy enabled AMD to pull ahead of Intel, which struggled with production issues and delays, in the "process race" to manufacture smaller, denser, and more power-efficient chips.
Lastly, AMD expanded into the data center market with its EPYC CPUs, Instinct GPUs, and programmable chips via its acquisition of Xilinx in 2022. Those moves helped AMD crack Intel's near monopoly in the data center market. All of those catalysts boosted AMD's revenue at a compound annual growth rate (CAGR) of 17% from 2014 to 2023.
According to PassMark Software, AMD's share of the x86 CPU market grew from 23.4% to 36.4% between the fourth quarters of 2014 and 2024. Intel's share shrank from 76.6% to 61.5% during the same period.
NASDAQ: AMD
Key Data Points
What happened to AMD over the past year?
AMD's revenue declined in the first half of 2023 as the PC market cooled off. That slowdown occurred after it lapped the industry's pandemic-driven growth spurt and dealt with tougher macroheadwinds in the consumer and enterprise markets. Sony and Microsoft also sold fewer units of their aging gaming consoles.
Its revenue rose again in the second half of the year as the PC market stabilized and the macroenvironment warmed up. Its growth accelerated again over the past two quarters as it sold more Zen 5 CPUs for the PC market, Epyc CPUs for servers, and Instinct GPUs for the artificial intelligence (AI) oriented data center market. Those three growth engines comfortably offset its declining sales of gaming and embedded chips.
|
Metric |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
4% |
10% |
2% |
9% |
18% |
|
Adjusted Gross Margin |
51% |
51% |
52% |
53% |
54% |
|
Adjusted Operating Margin |
22% |
23% |
21% |
22% |
25% |
|
Adjusted EPS Growth (YOY) |
21% |
12% |
3% |
19% |
31% |
Data source: AMD. YOY = Year-over-year. EPS = earnings per share.
AMD also profited from Intel's big blunders. Intel fell far behind TSMC in the process race. It repeatedly shifted strategies under three different CEOs over the past six years (it currently lacks a permanent CEO), and struggled with chip shortages and low yields. To stay in the AI race, AMD sold its Instinct GPUs at much lower prices than Nvidia's comparable H100 GPUs. In the third quarter of 2024, it generated more than half of its revenue from its data center chips.
What's next for AMD?
AMD seems to have passed the trough of its cyclical slowdown. For Q4, it expects its revenue to rise about 22% year over year with an adjusted gross margin of 54%. Analysts expect its revenue and adjusted earnings per share (EPS) to grow 13% and 25%, respectively, for the full year. For 2025, they expect its revenue and adjusted EPS to increase 27% and 56%, respectively.
Those are stunning growth rates for a stock which trades at 26 times forward earnings. By comparison, Nvidia and Intel trade at 33 and 23 times forward earnings, respectively. Nvidia is growing a lot faster than AMD, but it's also a riskier all-in play on the AI market which generated 88% of its revenue from its data center chips in its latest quarter. Intel's stock might seem slightly cheaper, but it faces a lot more headwinds than AMD.
Therefore, I believe AMD is a compelling buy at its current prices. Its slowdown in 2023 spooked some investors, but its growth is accelerating again, its AI business is expanding, and it will likely keep drawing PC and server makers away from Intel.
