While AI leader Nvidia (NASDAQ: NVDA) reported stellar Q1 earnings, computer processor and graphics card maker Advanced Micro Devices (NASDAQ:AMD) underperformed relatively, only meeting expectations. This led to a drop in the stock price after the earnings report. However, investors should note that NVDA is a few quarters ahead of AMD. AMD is showing impressive growth in its AI-driven data center revenues, which will eventually trickle down to margins and profits. This is why I am bullish on AMD stock.
AMD’s subdued first-quarter earnings failed to impress investors
On April 30, AMD reported first-quarter earnings of $0.62 per share, in line with analyst estimates. The figure was just 3.33% higher than the $0.60 per share figure in the first quarter of fiscal 2023. First-quarter revenue grew 2.2% year over year to $5.47 billion, also roughly in line with consensus estimates. Revenue in the robust data center segment helped offset some of the weakness in the embedded and gaming segments, but overall first-quarter results were lackluster.
Crucially, Data Center revenue growth remained impressive, with a whopping 80% year-on-year growth during the quarter, driven by the launch of the latest MI300 AI accelerators, Ryzen and EPYC processors. Disappointingly, however, Gaming revenue fell 48% year-on-year due to a decline in gaming chip sales. Further, adjusted gross and operating margins were uninspiring, at 52% (78.4% for Nvidia) and 21% respectively.
Next, AMD’s revenue guidance met Street expectations. For Q2, total revenue is expected to be around $5.7 billion (+/- $300 million). On the positive side, management raised its outlook for datacenter GPU sales, now expecting $4 billion from the previously expected $3.5 billion. The company’s adjusted gross margin is estimated at around 53%.
AMD’s AI product roadmap offers strong growth potential
A relatively disappointing first quarter and fears that demand for AI is slowing have led to a 28% drop in AMD shares, from a record high of $227 in March 2024 to around $164 currently.
However, investors should keep in mind that AMD is NVDA’s biggest competitor. AMD’s GPUs are known to be a cheaper alternative to NVDA’s GPUs. Given the obvious gap between supply and demand due to limited production capacity, the rise in popularity of AI creates an opportunity for AMD chips to close the gap.
Microsoft for example (NASDAQ:MSFT) recently announced that its cloud computing customers using Azure can opt for AMD’s MI300 chips along with NVDA’s H100 GPUs. This gives customers an alternative in cases of general supply constraints or individual customer budget constraints. Notably, AMD’s MI300 accelerator, which competes with NVDA’s H100 chips, costs 33% less.
While Nvidia currently leads the AI and GPU markets with over 80% market share, AMD’s competitive pricing and performance improvements could help the company gain market share over time. It’s worth noting that MI300 is considered the fastest growing product in AMD’s history. It was launched just two quarters ago and has already crossed the $1 billion sales milestone.
It is no wonder that AMD management has consistently raised the sales outlook for MI300 over the past three quarters. There is a strong possibility that the trend of increasing sales will continue in the coming quarters.
It is important to note that AMD has a wider range of offerings compared to NVDA. While NVDA is known for its powerful GPUs for data centers, AMD offers a wider range including CPUs for PCs and GPUs for the gaming industry. During COVID-19, the PC market saw a huge demand. Now, it is time again for users to switch to new PCs with improved technology. AMD is a major supplier for the high-end PC market and will undoubtedly benefit from the rising demand for PCs.
Furthermore, both NVDA and AMD continue to unveil their latest products, including accelerators and processors. While AMD launched its MI300 accelerators in December 2023, NVDA launched its Blackwell GPUs in March 2024.
In response to NVDA’s pace of innovation, AMD CEO Lisa Su also announced an annual series of new product launches at the Computex show on June 2. The product roadmap looked impressive, with newer launches year over year that were expected to gradually contribute to revenue and profit.
AMD has notably been consistently making acquisitions to enhance its datacenter offerings, acquiring Xilinx in February 2022 and Pensando Systems in May 2022. Moreover, the acquisitions have not yet been fully integrated and are expected to create a $10 billion cross-selling opportunity, as management noted. With its acquisitions, its total addressable market continues to grow, rising from just under $80 billion in FY2020 to $300 billion currently.
AMD’s valuation isn’t cheap, but still seems reasonable
Surprisingly, AMD is trading at a high forward P/E multiple (47x), slightly higher than AI prodigy Nvidia which is trading at a forward P/E of 45x. What could be the reason for AMD’s high valuation despite it lagging NVDA’s inspiring results? The answer is clear: AMD will likely follow in NVDA’s footsteps in the coming years as the AI growth story has only just begun.
Now, let’s take a look at whether AMD is worth buying at current levels. Wall Street analysts expect AMD’s EPS to be around $5.59 in FY2025 (with expectations of around $6.50 in FY2026). If AMD maintains the same forward P/E multiple of 47x at that time, the stock will be worth around $275, or 68% higher than its current price.
In other words, AMD shares are trading at a price-to-earnings multiple of 28x fiscal 2025 earnings per share estimate, which represents a 35% discount to the historical five-year average of 43x.
Therefore, it makes sense to buy AMD shares at current prices, given the strong growth fundamentals in the AI sector.
Is it a bargain to buy Advanced Micro Devices, according to analysts?
Wall Street analyst sentiment is decidedly positive on Advanced Micro Devices stock. The stock has a Strong Buy consensus rating, with 28 Buy recommendations and seven Holds. AMD’s average price target of $191.03 implies 16.6% upside potential from current levels.
Conclusion: Consider AMD for Long-Term AI Potential
There is clear demand for AI across a wide range of industries as companies look to build their own data center infrastructure. This implies that strong growth in sales of AI chips, GPUs, and CPUs will continue for at least several years. AMD’s advancements in AI and data center solutions position the company well for future growth, and its competitive pricing will help it gain market share over time.
Additionally, AMD has a strong position in the AI PC market and will likely continue to gain market share. The upcoming PC upgrade cycle with AI-enabled PCs will contribute to AMD’s revenue and margin growth in the coming quarters. Given my bullish stance, I see the current weakness in the stock price as a buying opportunity.
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