Up 130% In The Last 12 Months, Will AI Power AMD’s Rally Post Q4 Results?

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Advanced Micro Devices

Advanced Micro Devices stock (NASDAQ: AMD) is expected to publish its Q4 FY’23 results toward the end of January,  reporting on a quarter that is likely to see the company’s CPU business pickup as the PC market shows signs of turning the corner. We expect the company’s revenues to come in at about $6.15 billion, in line with consensus estimates, and about 9% ahead of the prior year. We project that earnings will come in at about $0.78 per share, slightly ahead of the consensus estimates. See our dashboard  AMD Earnings Preview for a closer look at what to expect when the company publishes results.

AMD’s performance over the early part of 2023 was mixed, with the PC industry undergoing a slump, as the tailwinds such as remote working and learning seen through Covid-19 eased. However, things picked up in Q3, with revenue from the Client group, which includes sales from PC processors, growing by 42% year over year to $1.5 billion. The gains were driven in part by higher demand for the Ryzen 7000 chips. Moreover, PC vendors worked through chip inventory that they built through the pandemic over the first few quarters of 2023 and this has been resulting in stronger demand for the likes of AMD as PC vendors replenish their inventory. This trend could play out over Q4 as well. Things could be a bit more stable on the server front as AMD continues to gain share over rival Intel, which has faced issues transitioning to smaller, more advanced process nodes.

Separately, we will be watching the performance of AMD’s GPU sales, considering the surge in demand for graphics chips following the success of the AI chatbot ChatGPT. Graphics processing units are becoming the de-facto chips for running AI-related workloads. While AMD’s GPUs have typically been used more for gaming and professional applications compared to Nvidia’s chips, which are the go-to GPUs for accelerated computing applications, AMD is also now focusing on winning over the AI market. The company has announced new chips such as the MI300X chip targeted specifically at large language model training and inference for generative AI workloads. The company expects $400 million in revenue from the MI300 chips over Q4, while indicating that sales could cross $2 billion in 2024.

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AMD stock has seen extremely strong gains of 80% from levels of $90 in early January 2021 to around $160 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in AMD stock has been far from consistent. Returns for the stock were 57% in 2021, -55% in 2022, and 128% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AMD underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMD face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

AMD stock has seen a meaningful rally over the past year. AMD trades at about 42x consensus 2024 earnings, which is a relatively high multiple. However, the ongoing recovery in the PC market and surge in demand from AI applications could justify this to an extent. While we value AMD stock at about $122 per share, about 24% below the current market price, we will be revisiting our price estimate for the company following Q4 results. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for more details on what’s driving our price estimate for AMD. Also, check out our analysis of AMD Revenue for more details on the company’s key revenue streams.

 Returns Jan 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 AMD Return 10% 151% 1334%
 S&P 500 Return 0% 25% 114%
 Trefis Reinforced Value Portfolio -2% 35% 593%

[1] Returns as of 1/18/2024
[2] Cumulative total returns since the end of 2016

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