Should You Buy AMD Stock Ahead of Its New AI Chip Launch?

Barchart · 10/17 13:30

As the artificial intelligence (AI) revolution continues, fueled by cutting-edge innovations, the race for data center dominance is heating up. If any sector craves fierce competition, it's the data center graphics processing units (GPU) market, where Nvidia (NVDA) reigns supreme - holding over 90% market share, and boasting a significant technological edge. However, other chipmakers, such as Advanced Micro Devices (AMD), are not just sitting on the sidelines; they’re gearing up to claim their slice of this lucrative pie.

With the market for AI data center GPUs projected to soar to $500 billion by 2028, AMD is making strategic moves to capitalize. Last Thursday, at the "Advancing AI 2024" event in San Francisco, AMD unveiled its latest AI chips, like the Instinct MI325X and MI355X, which are anticipated to go toe-to-toe with Nvidia’s “Hopper” H200 and “Blackwell” B100 at the GPU level.

CEO Lisa Su announced that the MI325X will start shipping by year’s end and hit the market in the first quarter of next year, making a bold entry into the high-stakes data center niche.

So, as the rivalry with Nvidia intensifies, should investors consider buying AMD stock? Let’s dive deeper into the numbers and potential.

About AMD Stock

Santa Clara-based Advanced Micro Devices (AMD), founded in 1969 as a Silicon Valley startup, has evolved into a semiconductor powerhouse, currently valued at a $252.3 billion market cap. Known for its cutting-edge Ryzen processors and Radeon GPUs, AMD drives innovation across data centers, gaming, and PCs.

The stock hasn’t joined the broader market in setting new highs lately, and is down 31.3% from its all-time March peak of $227.30. But let’s not forget the bigger picture - AMD is still up a solid 50% over the past 52 weeks, edging past the iShares Semiconductor ETF’s (SOXX) 45.4% returns. AMD’s long-term performance is driven by its growing AI presence and tech innovations that keep it ahead of the curve.

From a valuation perspective, AMD stock trades at 46.07 times forward adjusted earnings and 10.84 times sales - a modest discount to peers like Nvidia, though it’s still priced at a premium to the broader tech sector. For investors eyeing investments with exposure to the fast-growing AI and data center markets, AMD’s current multiple looks competitive.

AMD Soars After Q2 Earnings Beat

Thanks to its stronger-than-projected Q2 earnings results, reported after the close on July 30, shares of Advanced Micro Devices rose over 4% the following session. The chip giant reported a 9% year over year revenue jump to $5.8 billion, fueled by record-breaking data center and client segment performance, beating Wall Street’s $5.7 billion estimate. Its adjusted EPS grew 19%, climbing to $0.69.

AMD’s data center revenue skyrocketed 115% to $2.8 billion, driven by strong AMD Instinct GPUs and 4th Gen EPYC CPUs. Its client revenue surged 49%, reaching $1.5 billion, boosted by impressive Ryzen processor sales. AMD’s AI chips were a standout, with the new MI300X alone pulling in over $1 billion in Q2, further fueling momentum for its next-gen Ryzen and EPYC lines.

As of June 29, AMD’s cash and equivalents slightly dipped to $5.34 billion, but total debt stayed steady at $1.72 billion. Operating cash flow climbed 56.5% to $593 million in Q2, with free cash flow surging to $439 million.

With the chip giant gearing up to release its Q3 earnings on Tuesday, Oct. 29, after the market closes, AMD projects its revenues to be approximately $6.7 billion, plus or minus $300 million, reflecting 16% annual and 15% sequential growth. Its non-GAAP gross margin is expected to be approximately 53.5%.

Analysts tracking AMD anticipate the Q3 bottom line to grow to reach $0.71 per share, up 34% year over year. In the longer term, analysts expect the company’s GAAP profit to reach $2.56 per share in fiscal 2024, up 28.6% year over year, and rise another 70.7% to $4.37 per share in fiscal 2025.

AMD’s New AI Chip Launch

AMD is on a mission to carve out a bigger slice of the data center processing pie, and last week’s "Advancing AI 2024" event revealed some key strategy details. AMD introduced 5th Generation AMD EPYC server central processing units, Ryzen AI Pro 300 Series PC processors, and most notably, Instinct MI325X accelerators, which is poised to challenge Nvidia’s dominance with its upcoming Blackwell chips.

The spotlight is on the Instinct MI325X, with the new AI chip intended as a direct shot at Nvidia’s powerful GPUs. If AMD’s new chip gains traction among developers and cloud giants, it could apply serious pricing pressure on Nvidia, which has basked in high demand and enviable gross margins of roughly 75%.

AMD isn’t just playing catch-up with its new MI325X aimed squarely at Nvidia’s Blackwell chips; it’s also revving up its product launch timeline. With Nvidia's Blackwell GPU already sold out for the next 12 months, AMD has an opportunity to swoop in, seize the supply gap, and flex its pricing muscle.

With AMD's 34% market share in data center CPUs and plans for new EPYC processors that enhance AI workloads, the company is gearing up to give Nvidia a run for its money.

What Do Analysts Expect for AMD Stock?

After AMD’s AI event, investment firms had mixed reactions. Oppenheimer found the event “largely uneventful,” saying AMD's product roadmaps were already well understood. While some investors expect the MI3XX family to generate around $10 billion in 2025 revenue, Oppenheimer believes sales may check in closer to $8 billion, warning of persistently high investor expectations.

Likewise, Wedbush analysts kept their “Outperform” rating and $200 price target, and noted that while AMD did not update AI sales guidance or announce big new customers, the potential for those moves was already factored into its valuation.

On the brighter side, Piper Sandler raised its price target to $200 from $175, while keeping an “Overweight” rating. After attending the event, Piper is “enthused” about AMD's prospects, especially in data centers and GPUs. The firm sees AMD's growing AI presence as expanding its total market opportunity, making it a strong rival to Nvidia and Piper’s top large-cap pick.

AMD stock has a consensus “Strong Buy” rating overall. Out of the 37 analysts covering the stock, 30 suggest a “Strong Buy,” one recommends a “Moderate Buy,” and six back a “Hold” rating.

The average analyst price target of $193.06 indicates a potential upside of nearly 22.6% from the current price levels. The Street-high price target of $250 suggests that AMD stock could rally as much as 58.9% from here.

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On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.