Advanced micro devices (NASDAQ: AMD) hasn’t gotten much sympathy on Wall Street lately, as evidenced by the 23% drop in the company’s stock price since hitting a 52-week high in early March.
The stock has been punished for weaker-than-expected growth in its artificial intelligence (AI) business in the first quarter of 2024, causing the company to miss market growth expectations. In addition, the stock was recently downgraded by Morgan Stanley from overweight to neutral, with the investment bank noting that investor expectations for the growth of its AI business are on the high side.
The bank added that it sees limited upside in AMD shares despite a recovery in the company’s core business segments. However, it may be too early to write off the semiconductor stock for a few simple reasons. Let’s take a closer look at two of them.
1. AMD is well-positioned to benefit from growing sales of AI computers
According to Mercury Research, AMD’s market share in desktop central processing units (CPUs) was 23.9% in the first quarter of 2024, up 4.7 percentage points from the same period last year. Meanwhile, notebook CPU share rose 3.1 percentage points to 19.3%. Intel AMD has the rest of the market share in its hands, but it’s notable that AMD has quickly made a dent in Intel’s market share.
The good news is that AMD has its sights set on the AI ​​PC market with its new generation of Ryzen processors, which come equipped with dedicated hardware to enable AI applications. Its new Ryzen AI 300 processors deliver 3x the performance of the previous generation offered in laptops. More importantly, AMD estimates that its processors will be able to power over 150 AI software experiences by the end of 2024, allowing its CPUs to continue to gain market share.
So there’s a good chance AMD can maintain the impressive growth momentum it’s currently seeing in the client processor business. The company’s revenue from sales of CPUs used in laptops and desktops rose 85% year over year in the first quarter to $1.4 billion.
AMD is the smaller player in the client CPU market, so if it continues to chip away at Intel’s market share and capitalizes on the opportunity in AI-enabled PCs, shipments of which are expected to grow at a compound annual rate of 44 percent over the next four years, client revenue could continue to grow at a healthy rate.
2. The data center sector has some solid catalysts
AMD’s data center business is benefiting from the spread of AI in several ways.
First, the company’s data center graphics processing unit (GPU) is now gaining popularity thanks to the huge demand for AI accelerators. This year, AMD predicts $4 billion in revenue from data center GPU sales. The company has been raising its revenue expectations from data center GPU sales in recent quarters as more customers line up to buy its chips.
Considering that AMD generated a total of $6.5 billion in revenue from its data center segment last year, it’s easy to see that this segment is on track to deliver robust growth in 2024. It’s also worth noting that AMD sold $400 million worth of data center GPUs in the fourth quarter of 2023, meaning it’s on track to deliver much faster quarterly revenue growth in this industry this year.
AMD’s revenue from data center GPUs could continue to grow significantly in the long term due to the huge revenue opportunities presented by the AI ​​chip market. In addition, the company plans to accelerate product development to make a greater impact in this market.
There’s another AI-related opportunity for AMD in the datacenter market, though, thanks to AI in the form of server processors. The company’s Epyc server CPUs are being deployed for AI inference applications, and they’re driving solid growth in datacenter revenue, along with GPUs. Specifically, AMD’s total datacenter revenue grew 80% year-over-year in Q1 to $2.3 billion.
Given that AMD has been gaining market share in server processors, investors can expect this tremendous growth to continue in the future. AMD’s server CPU unit market share increased by 5.6 percentage points year-over-year to 23.6%, while its revenue share increased to 33%. This is again at the expense of Intel and bodes well for AMD, as the global server market is expected to grow by more than 12% per year for the next five years.
These catalysts explain why AMD’s growth is expected to improve.
Investors would therefore be wise to take advantage of AMD’s decline, as the stock market could reward stronger growth with more upside potential in the future.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool recommends Intel and recommends the following options: long Jan 2025 $45 calls on Intel and short Aug 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Wall Street May Be Underestimating This Artificial Intelligence (AI) Stock: 2 Reasons You Should Consider Buying While It’s Still in Trouble was originally published by The Motley Fool
