AMD long - >200$ again by mid 2026 at the latest
My analysis of Advanced Micro Devices and why AMD could be a top stock in 2025
- AMD's share price has recently fallen below USD 120 and has an attractive risk profile despite the negative investor sentiment.
- AMD's data center segment shows promising growth potential with the MI300X chip, enabling it to compete with Nvidia's dominance in the AI GPU market.
- AMD's valuation of 24.4 P/E offers a 22% discount to Nvidia, making it an attractive buy ahead of a potential recovery.
- AMD's upcoming AI accelerators and emerging data center business could significantly boost sales, gross profit and free cash flow in fiscal 2025.
Introduction:
Shares of AMD have disappointed massively since the semiconductor company announced results for its third fiscal quarter in October.
Although AMD reported a year-over-year doubling in revenue for its Data Center segment in the September quarter, a relatively modest revenue forecast for the fourth fiscal quarter has created a significant negative sentiment. It didn't help that Micron Technology recently forecast weaker-than-expected sales for the current fiscal quarter, which further increased downward pressure on semiconductor company valuations. However, with AMD shares recently falling below USD 120, I believe the risk profile here is very attractive.
Latest news and figures:
Product innovations:
AMD has introduced the "Zen 5" Ryzen processors that enhance AI capabilities in PCs, with significant improvements in AI processing power, efficiency and system performance
Strategic moves:
Tim Keating has joined AMD as Senior Vice President, Government Relations and Regulatory Affairs, positioning the company to strengthen its advocacy and regulatory engagement efforts
Market Positioning:
Despite a slight decline last week, AMD's strategic partnerships, particularly in the supply of chips for autonomous vehicles, demonstrate its strong commitment to high-growth sectors.
Current share price: $125.19
52-week range: $117.90 - $227.30
Market capitalization: 203 billion USD
Valuation and performance ratios:
P/E ratio 111.2
Forward P/E 24.4
EPS growth (YTD) 25.7%
Sales growth next year 26.9%
Analyst insights and ratings
Analysts remain very positive on AMD's growth trajectory, underpinned by recent product launches and innovations:
Consensus rating: 🌟🌟🌟🌟🌟 strong buy
Average target price: $188.67
Yield potential: 50-70%
Outlook:
Technological advances:
The introduction of Ryzen AI 300 series processors is expected to significantly enhance computing experiences with advanced AI capabilities. This is seen as a key development that could expand AMD's market share in AI-infused computing.
Market Performance:
AMD stock has experienced a downward trend in its annual performance despite a positive return over five years, reflecting the volatile nature of the technology sector and its sensitivity to broader market shifts.
My valuation and assessment
I rated AMD shares as a strong buy after the company reported its fiscal third quarter earnings statement, due to a promising product pipeline related to AI accelerators. In addition, AMD has seen very impressive momentum in its data center business, which I don't think is properly appreciated by investors, with the company now generating more than half of its total revenue from data centers. With AMD set to ramp its MI300X Instinct chip shipments in the fourth quarter and fiscal 2025, AMD has significant potential to catch up to Nvidia, which has outpaced the company in the data center market over the past two years. Above all, AMD's valuation makes no sense to me and I believe the risk profile is currently extremely attractive.
Data center revenue growth is far from being reflected in AMD's valuation
AMD has long lagged behind Nvidia, but has recently pulled itself together and launched its own AI accelerator for data centers called MI300X. This AI accelerator offers data center operators an alternative to Nvidia's H100 chip, and given Nvdia's current supply constraints, the outlook for MI300X shipments is extremely positive.
While Nvidia has already seen a massive increase in its revenue, gross profits and earnings due to the success of the H100 chip in the data center segment, Nvidia still has a distinct advantage over AMD in that it generates a much higher proportion of its total revenue from its booming data center business: Last quarter, data centers were responsible for 88% of consolidated revenue, compared to just 52% for AMD. However, AMD's share of data center revenue has steadily increased over the past year, nearly doubling year-over-year, suggesting that AMD will also see an acceleration in its consolidated revenue if this current momentum continues.
AMD has a well-stocked product pipeline and plans to release new AI accelerators - MI325X and MI350 series AI accelerators - in FY2025, which are expected to boost the company's revenue growth. With AMD now generating more than half of its total revenue from data centers (compared to only about a quarter in the third quarter of 2023), accelerating data center revenue growth should also significantly boost AMD's consolidated revenue growth, gross profits and free cash flows.
In terms of gross profit, Nvidia is still significantly more profitable than AMD, but AMD's gross profit trend is also showing signs of improvement ... which is directly related to the company's success in the data center market. AMD may have even more potential to increase its gross profit margins when higher-priced next-generation AI accelerators like the MI325X hit the market next year.
Nvidia's free cash flow increased by 138% last quarter, while AMD's free cash flow increased by 67%. Nvidia is therefore increasing this important key figure twice as fast as AMD. However, AMD has the potential to catch up with Nvidia as its data center business only picked up speed in Q2 and Q3 2024. While AMD has lagged well behind Nvidia in the data center business, AMD's MI300X shipment growth in fiscal 2025 could make a big difference for the semiconductor company.
AMD's valuation makes no sense
In addition to a promising product pipeline in terms of the MI300, MI325 and MI350 AI accelerators, I believe that AMD's valuation itself now represents a small competitive advantage over Nvidia.
Nvidia is still the most highly valued semiconductor company on the market with a price-to-earnings ratio of 31.5. AMD, on the other hand, is currently valued at a P/E ratio of 24.4, which is a 24% discount to AMD's longer-term 3-year average P/E and a 22% discount to Nvidia's valuation. About three months ago, Nvidia and AMD were trading at about the same earnings multiple. However, Nvidia has a very strong investor base, which is why I believe that investors should also take advantage of the opportunity here and buy on the downside.
AMD's Q4 2024 guidance disappointed investors - the chip company forecast revenue of $7.5bn +/- $300m, compared to expectations of $7.6bn - leading to negative sentiment that I don't think is really justified. First, AMD's forecast miss was only minor ($7.5B midpoint vs. $7.6B expected) and second, AMD's Data Center segment has already seen a significant uptick in revenue directly related to the release of the MI300X Instinct chips.
In my last analysis on AMD, I indicated that I see a fair value for AMD shares in the range of $216-252 per share, based on a fair P/E of 36 and an estimated earnings range of $6-7 per share for fiscal 2025. I confirm my expectations and remain more optimistic than the market, which currently only expects earnings of $5.10 per share for next year. I am much more bullish on AMD as the semiconductor company is seeing significant growth in the data center space and shipments for AI accelerators are increasing, especially in the first half of 2025. I believe the market may be a bit too conservative with its estimates. Given the underlying drivers of AMD's business and proven execution in fiscal 2024, I do not believe AMD's low P/E ratio is justified.
Risks for AMD
AMD lags far behind Nvidia in terms of gross profit and even free cash flow margins. However, Nvidia's revenue growth related to a new line of AI chips in the data center market is very promising. However, there are still a lot of risks for AMD, including that Nvidia still very much dominates the AI GPU market. Although AMD could benefit from Nvidia's Blackwell shortage, AMD still needs to improve core metrics like free cash flow and gross profit margins... which I think is necessary to justify a re-rating to a higher P/E. What would change my opinion of AMD would be if the company experienced slowing growth in the data center market or failed to increase its MI300X shipments in fiscal 2025.
Bottom line:
AMD is more than just a Christmas present at its current price and valuation. The semiconductor company is on the verge of a significant increase in data center revenue, which should simultaneously boost AMD's gross profits and free cash flows in fiscal 2025. AMD's product pipeline may be in the best shape in years, especially with regard to the company's AI accelerators for data center operations, and I believe AMD has a strong valuation advantage over Nvidia here.
Although Nvidia's shares have also consolidated recently, AMD's shares are now a solid 22% cheaper from a price-to-earnings perspective, potentially allowing investors to buy AMD ahead of a rally to the upside in 2025. AMD has several catalysts in its business, most notably the launch of next-generation AI accelerators in fiscal 2025, which could accelerate AMD's data center-driven revenue growth.
Sources:
https://www.cmcmarkets.com/en/optox/amd-stock-vs-nvda-stock-whos-winning-the-chip-race
https://seekingalpha.com/article/4746348-amd-the-valuation-makes-no-sense
