AMD Is a Distant No. 2 to Nvidia. Its Stock Could Be a Winner Anyway.
Updated May 23, 2024 8:56 am EDT / Original May 23, 2024 1:00 am EDT
AMD stock, up more than 500% over the past five years, has dropped some 20% since peaking on March 7. What began as a simple decline as the market pulled back following a hot start to 2024 morphed into something more worrisome as quarterly earnings beat by just a penny and guidance was left unchanged. AMD didn’t seem to be making enough progress in AI against Nvidia
Investors needn’t worry. AMD’s gaming and industrial businesses should stabilize, and demand for chips in data centers should grow as companies diversify from Nvidia, even if only a little. In effect, AMD remains in the same position it was when Intel
“This is the Pepsi and Coke of the semiconductor industry,” says Rhys Williams, chief investment officer at Wayve Capital Management, which owns AMD. Tech, he adds, needs a second source to Nvidia to ensure chips are always available at good prices.
The upshot: AMD stock could remain on its long-term trajectory—it has climbed more than 1,000% in 20 years. That’s not Nvidia’s 53,000% gain, but it’s hardly shabby.
The case for the stock starts with stabilization of its industrial and gaming businesses. Though less glitzy than AI, the segments represented half of AMD’s business in 2023.
AMD’s industrial revenue, which includes sales to auto makers, other manufacturers, and communications companies, looks close to bottoming. It was $846 million in the first quarter, but analysts expect it to move higher this year to some $1.1 billion in the fourth quarter, representing a modest year-over-year gain. The field has been plagued by oversupply for the past few years, which AMD and its rivals are now working off.
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Certainly, Analog Devices’ results this past week bode well for the industrial segment. For its fiscal second quarter, Analog Devices
A rebound in gaming sales may be more gradual. Analysts see gaming revenue down this year, but up a few hundred million dollars next year to $3.37 billion. The keys are the health of consumers and new games like Take-Two Interactive Software’s Grand Theft Auto VI, expected next year, firing up consumers to buy consoles.
These rebounds would put the focus on AMD’s data-center business, which includes the new AI chip, MI300. Sales of MI300 haven’t ramped as quickly as expected, but it’s starting to get up to speed. Management projected 2024 sales of $3.5 billion on its January earnings call, then raised that to $4 billion in late April, citing strengthening demand.
In fact, the MI300 has become AMD’s fastest chip launch ever. In April, CEO Lisa Su said MI300 surpassed $1 billion in sales in less than two quarters after launching in December. Su and other AMD executives weren’t available for comment for this article
The demand is coming from Meta Platforms, Microsoft, Alphabet, and other chip customers as they build out data-center capacity to support AI. They need chips immediately, and they want to limit costs, which means buying from multiple vendors, playing into AMDs hands.
AMD’s sales to data centers should hit $12.2 billion in 2024, nearly double last year, according to FactSet’s analyst estimates. That looks doable, given it isn’t even 15% of Nvidia’s expected $94 billion in data-center sales. As AMD improves production and effectiveness of MI300, a common process for the early stages of new chips, its price should close the gap with Nvidia.
Analysts expect AMD to notch 35% data-center revenue growth annually, reaching more than $30 billion by 2027. That’s faster than projections for total AI spending— Gartner sees 20% annual increases over roughly the same span—and Nvidia’s expected data-center growth. But such speed isn’t surprising—AMD is playing catch-up.
AMD’s total revenue is on track to hit $47 billion, with operating margins expanding by more than 10 percentage points, according to FactSet. Not only do data-center chips have higher margins—and are faster growing—but total chip volume sold is expected to increase faster than costs such as salaries and research and development.
As a result, earnings per share can increase almost 40% annually, from $2.65 last year to $10 in 2027. The shares aren’t cheap: They change hands at 38 times expected earnings for the next 12 months, a few points higher than Nvidia’s multiple. But by another measure, the multiple is reasonable: It’s less than one times expected earnings growth, while the S&P 500’s price/earnings ratio is twice expected earnings growth.
The point is that AMD can play second fiddle to Nvidia and still be a great deal for investors, just as it was when it was chasing Intel. Being No. 2 can have its rewards.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
