HomeBusinessDown 30% from Record Highs, Is AMD Stock a Buy?

Down 30% from Record Highs, Is AMD Stock a Buy?

Shares of Advanced micro devices (NASDAQ: AMD) have made a stunning return journey so far in 2024. Following management’s increasingly optimistic commentary on artificial intelligence (AI) sales early this year, the stock moved higher.

But then reality started to settle after the first quarter update, and shares are now down about 30% from the highs reached early in the spring.

If you’ve been following along, there’s always been a clear reason to be bullish on AMD – and a clear reason to be skeptical. Is it time to buy the stock dip?

AI is going to be huge. What happened?

As 2024 begins, CEO Lisa Su and her team became increasingly optimistic about AI chip sales. Su has forecast $2 billion in sales of accelerated computers (accelerated computing is the real trend behind the scenes, and not just AI). But in January, the outlook was raised to $3.5 billion.

So for a company that had last-12-month sales of $22.8 billion, AI chips represent a significant, but not huge, new market. The new MI300 accelerated computing system is reportedly AMD’s fastest product to reach $1 billion in sales, reaching this status in just two quarters.

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Suffice it to say, investors were excited.

But the reality check? Despite the rave reviews for AMD AI, the $3.5 billion guidance for 2024 AI sales was not raised again during the first quarter update.

And the second quarter guidance was also a bit lackluster. At the midpoint, expectations for the quarter are for $5.7 billion in revenue, up 4% from the previous quarter and just 6% from the previous year – when AMD’s results were still in the doldrums of the bear market.

Hopes are (rightly) waning that AI revenues from AMD data centers could go parabolic Nvidia‘s has.

AMD Earnings Chart (TTM).

AMD Earnings Chart (TTM).

AMD’s focus cannot be the same as Nvidia’s

As I’ve written numerous times since the completed Xilinx acquisition in early 2022, rising profit margins are the main reason AMD could remain a winning semiconductor stock.

This is why I was skeptical about AMD stock’s aggressive rally in recent months. Hidden behind all the AI ​​talk from management in recent quarters was a more somber message about the need to get profit margins back on track.

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The bear market did indeed bode well for AMD, especially as consumer spending on PCs and laptops (the customer revenue segment) fell. The segment’s operating profit was $86 million in the first quarter, with a margin of just 6%. There’s a ton of room for improvement as consumer PC spending stabilizes this year.

AI chips in data centers don’t really provide a huge compensation for the weakness in other parts of the business, such as embedded (Xilinx) and gaming (video game consoles). But what AMD’s data center lacks in revenue growth is that do compensate for the expansion of the profit margin. Operating margins were 23% in the first quarter, compared to a paltry 11% the year before.

AMD operating margin (TTM) chartAMD operating margin (TTM) chart

AMD operating margin (TTM) chart

AMD still has a way to go until it returns to somewhere near its last peak level of profitability in 2022. But if it gets back on a positive trajectory, shares could still be a reasonable deal at 46 times https://www .fool. com/terms/f/forward-pe/, although perhaps not a particularly amazing value.

Let’s pretend the new all-time highs in stocks this spring never happened at all, instead of calling this a dip. I am a shareholder and am patiently waiting to see how this story turns out, but I am not buying at the moment.

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Nicholas Rossolillo and his clients have positions in Advanced Micro Devices and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

Down 30% Ever, Is AMD Stock a Buy? was originally published by The Motley Fool

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