Advanced Micro Devices' (AMD +18.37%) stock price dropped 6% on Feb. 5 after the chipmaker posted its fourth-quarter earnings report. Its revenue rose 24% year over year to $7.66 billion and exceeded analysts' estimates by $132 million, while its adjusted EPS grew 42% to $1.09 and matched the consensus forecast.
Those headline numbers looked impressive, but the decelerating growth of its closely watched data center business likely disappointed the bulls. Let's see if the market overreacted and created a worthwhile buying opportunity for patient investors.
Image source: Getty Images.
What happened to AMD over the past two years?
AMD is the world's second-largest producer of x86 CPUs for PCs and servers after Intel. It's the second-largest producer of discrete GPUs for gaming PCs and data centers after Nvidia (NVDA +5.93%), and it sells programmable chips through its Xilinx subsidiary. It also sells custom APUs (accelerated processing units) that merge together CPUs and GPUs for notebook computers and gaming consoles.
AMD's revenue declined year over year in the first half of 2023 as the PC market cooled off. That slowdown occurred as it lapped its pandemic-era growth spurt and inflation curbed consumer spending. Its custom APU sales also declined as Sony and Microsoft sold fewer gaming consoles. But over the past year, its top-line growth accelerated again as its margins expanded.
|
Metric |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
Q4 2024 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
10% |
2% |
9% |
18% |
24% |
|
Adjusted gross margin |
51% |
52% |
53% |
54% |
54% |
|
Adj. operating margin |
23% |
21% |
22% |
25% |
26% |
|
Adj. EPS growth (YOY) |
12% |
3% |
19% |
31% |
42% |
Data source: AMD. YOY = Year-over-year.
That recovery was driven by two tailwinds. First, its client segment, which mainly sells its x86 CPUs for PCs, continued to gain ground against Intel with its Ryzen 8000 CPUs. Second, its data center segment, which sells its Epyc CPUs and Instinct GPUs for servers, grew rapidly as the AI market expanded. Those growth engines offset its soft sales of gaming GPUs, custom APUs for consoles, and Xilinx's embedded chips.
For the first quarter of 2025, AMD expects its revenue to rise by a midpoint of 30% year over year as its adjusted gross margin expands to approximately 54%. For the full year, analysts expect its revenue and adjusted EPS to grow 24% and 43%, respectively.
So why weren't investors impressed?
Those growth rates look healthy, but the bulls were likely disappointed by the slowing growth of its data center business. The segment's revenue rose 69% year over year in the fourth quarter and accounted for about half of its revenue, but that represented a significant slowdown from its triple-digit growth in the previous two quarters.
|
Metric |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
Q4 2024 |
|---|---|---|---|---|---|
|
Data Center revenue |
$2.3 billion |
$2.3 billion |
$2.8 billion |
$3.5 billion |
$3.9 billion |
|
Growth (YOY) |
38% |
80% |
115% |
122% |
69% |
Data source: AMD. YOY = year over year.
That deceleration dampened the bullish thesis that AMD's Instinct GPUs would gain significant ground against Nvidia's H100 GPUs in the AI-oriented data center market. AMD's GPUs are much cheaper than Nvidia's, but Nvidia has already conquered about 98% of the data center GPU market with its first mover's advantage, premium reputation, and proprietary CUDA (Compute Unified Device Architecture) platform for GPU applications. So, while some companies might experiment with AMD's Instinct GPUs as a cheaper alternative to Nvidia's GPUs, it doesn't seem likely that the former will ever disrupt the latter.
During the fourth-quarter conference call, AMD CEO Lisa Su predicted its data center business would continue to grow by the "strong double digits" in 2025 as it ramps up its production of its new Instinct MI350 GPUs. That outlook is bright, but investors likely expected an even more aggressive forecast for the AI-driven segment.
NASDAQ: AMD
Key Data Points
So, is this the right time to buy AMD?
At $110 per share, AMD's stock still looks reasonably valued at 24 times forward earnings. But Nvidia -- which is expected to more than double its revenue and adjusted EPS in fiscal 2025 (which ended in January) and then grow both figures by more than 50% in fiscal 2026 -- trades at just 31 times forward earnings. We should take those estimates with a grain of salt, but Nvidia is clearly selling the best picks and shovels for the AI gold rush.
Therefore, AMD isn't a bad stock, but it just doesn't look more appealing than Nvidia. AMD has carved out a little niche in the data center market, but it certainly won't transform into the "next Nvidia" anytime soon. So, while AMD is worth nibbling on at these levels as its data center market expands, it really can't be considered a golden buying opportunity yet.
