Advanced Micro Devices (AMD +3.47%) stock fell following the release of the company's fourth-quarter 2024 results on Feb. 4, and a closer look at the company's quarterly performance and outlook indicates that investors may have overreacted.
AMD not only delivered impressive growth and beat Wall Street's expectations on both revenue and earnings, but its guidance for the current quarter also exceeded consensus estimates. However, the stock was punished and fell 6% the following day as AMD's data center revenue was not up to the mark.
NASDAQ: AMD
Key Data Points
Let's see why AMD investors pressed the panic button.
Data center revenue miss sends AMD stock into a tailspin
AMD has been playing second fiddle to Nvidia in the market for graphics processing units (GPUs) deployed in data centers for tackling artificial intelligence (AI) workloads. Investors were hoping that the chipmaker would gain some ground in this market, but its data center revenue of $3.9 billion for the quarter was lower than the consensus estimate of $4.15 billion.
What added to the negativity was AMD's forecast of a 7% sequential decline in the data center revenue for the current quarter. Investors, however, seem to be missing the bigger picture. AMD's data center revenue reached record levels last quarter, increasing 69% from the year-ago period thanks to the growing sales of its AI data center accelerators as well as server processors.
The full-year data center revenue also reached a record level of $12.6 billion, which was nearly double the year-ago period. Also, AMD points out that its data center revenue in the first half of 2025 will be similar to what it generated from this segment in the second half of 2024. A closer look at CEO Lisa Su's comments on the earnings conference call suggests that it could witness an acceleration in the second half. "We're continuing to bring on new customers. Clearly, we are going through a little bit of a product transition time frame in the first half of the year," she said.
The product transition that Su is referring to is the faster deployment of its next-generation MI350 AI graphics cards. AMD will start sampling its MI350 chips in the current quarter, and it plans to start shipments by the middle of the year. AMD earlier planned to bring out the MI350 series in the second half of 2025. However, positive customer feedback and demand have encouraged AMD to pull up the timeline.
The company further points out that its data center GPU revenue landed at more than $5 billion in 2024. Though the company didn't give a concrete number for 2025, it expects data center revenue to "grow strong double digits certainly." Also, Su sees the data center business "growing to tens of billions, as we go through the next couple of years."
So, AMD is confident that its data center business could get back on track once again and grow substantially in the long run. Meanwhile, investors should not ignore the outstanding growth that AMD is witnessing in another key segment.
The PC segment is in fine form, and the outlook is solid
AMD's client segment, which includes sales of processors used in desktops and notebooks, surged an impressive 58% year over year in the previous quarter to $2.3 billion. That was much better than the 1.8% increase in personal computer (PC) shipments in the fourth quarter of 2024, suggesting that AMD's market share gains in PC CPUs (central processing units) are continuing.
The good part is that AMD believes it will continue to gain share in the PC CPU market this year. The company estimates a mid-single-digit increase in PC shipments in 2025. Management added on the earnings call that it "can grow client segment revenue well ahead of the market" thanks to its broad portfolio of chips and strong design win momentum.
In all, both of AMD's key business segments are likely to enjoy healthy growth this year. This is evident from the company's guidance for Q1. The chipmaker expects its top line to increase by 30% year over year in Q1 to $7.1 billion at the midpoint of its guidance range. That points toward an improvement over the 24% year-over-year increase in its revenue in Q4 2024.
Additionally, AMD expects its non-GAAP (adjusted) gross margin in Q1 to jump by 2 percentage points from the year-ago period. That should ideally translate into outstanding bottom-line growth following the 42% year-over-year increase in its earnings last quarter. So, AMD's growth rate remains impressive despite the short-term hiccup that it sees in the data center business owing to the transition to its next-generation chip.
Analysts are expecting AMD to deliver 43% earnings growth in 2025. That would be an improvement over the 25% jump it clocked last year. However, the uptick in the company's data center business in the second half of the year, along with the strong momentum of the PC business, could pave the way for stronger earnings growth.
That's why investors can consider buying this semiconductor stock following its latest drop. It is trading at an attractive 23 times forward earnings -- a discount to the tech-laden Nasdaq-100 index's forward earnings multiple of 28 -- and is clocking robust top and bottom-line growth that could help it regain its mojo and head higher in the future.
