AMD (NASDAQ: AMD) was once considered a struggling underdog chipmaker that was left behind Intel And Nvidia in the x86 CPU (central processing unit) and discrete graphics processing unit (GPU) markets respectively. But over the past decade, the stock is up about 5,110% as it gains ground against Intel and keeps pace with Nvidia.
That rally would have turned a $20,000 investment into more than $1 million. But over the past 12 months, the stock has remained broadly flat as sluggish growth in the PC market offsets the expansion of the faster-growing data center business. Does this breathing space represent a golden buying opportunity for long-term investors?
Lisa Su, who took over as CEO of AMD in 2014, transformed the chipmaker with three main strategies. First, AMD introduced more custom Accelerated Processing Units (APUs) that brought together CPUs and GPUs on a single chip. It sold many of those chips to game console makers, such as Sony And Microsoftand that growth fueled the expansion of its enterprise, embedded and semi-custom (EESC) businesses, while generating more cash for its core CPU and GPU businesses.
Second, Su has pushed AMD to redesign its CPUs to address the disappointing performance of the previous generation of Bulldozer chips. Unlike Intel, which still manufactured most of its chips in its own foundries, AMD outsourced the production of its most advanced chips to TSMC. That “fabless” strategy allowed AMD to stay ahead of Intel, which was struggling with production problems and delays, in the “process race” to produce smaller, denser and more energy-efficient chips.
Finally, AMD expanded into the data center market with its EPYC CPUs, Instinct GPUs, and programmable chips through the acquisition of Xilinx in 2022. These moves helped AMD break Intel’s near-monopoly in the data center market. All of these catalysts increased AMD’s revenue at a compound annual growth rate (CAGR) of 17% between 2014 and 2023.
According to PassMark Software, AMD’s share of the x86 CPU market grew from 23.4% to 36.4% between the fourth quarter of 2014 and 2024. Intel’s share shrank from 76.6% to 61.5% over the same period.
AMD’s revenue fell in the first half of 2023 as the PC market cooled. That slowdown came after it overcame the industry’s pandemic-induced growth spurt and faced tougher macroeconomic headwinds in consumer and business markets. Sony and Microsoft also sold fewer units of their aging gaming consoles.
Sales rose again in the second half of the year as the PC market stabilized and the macro environment warmed. Its growth accelerated again over the past two quarters as it sold more Zen 5 CPUs for the PC market, Epyc CPUs for servers and Instinct GPUs for the artificial intelligence (AI)-focused data center market. These three growth engines more than offset declining sales of gaming and embedded chips.
|
Metric |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
Sales growth (YYY) |
4% |
10% |
2% |
9% |
18% |
|
Adjusted gross margin |
51% |
51% |
52% |
53% |
54% |
|
Adjusted operating margin |
22% |
23% |
21% |
22% |
25% |
|
Adjusted earnings per share (YYY) |
21% |
12% |
3% |
19% |
31% |
Data source: AMD. YOY = Year-on-year. EPS = earnings per share.
AMD also benefited from Intel’s major blunders. Intel fell far behind TSMC in the litigation race. The company has repeatedly changed strategy over the past six years under three different CEOs (currently lacking a permanent CEO) and has struggled with chip shortages and low returns. To stay in the AI race, AMD sold its Instinct GPUs at much lower prices than Nvidia’s comparable H100 GPUs. In the third quarter of 2024, it generated more than half of its revenue from its data center chips.
AMD appears to have passed the bottom of its cyclical slowdown. For the fourth quarter, the company expects revenue to increase approximately 22% year over year, with an adjusted gross margin of 54%. Analysts expect full-year revenue and adjusted earnings per share (EPS) to grow by 13% and 25%, respectively. For 2025, they expect revenue and adjusted earnings per share to rise 27% and 56%, respectively.
Those are staggering growth figures for a stock that trades at 26 times forward earnings. By comparison, Nvidia and Intel trade at 33 and 23 times forward earnings, respectively. Nvidia is growing a lot faster than AMD, but it’s also a riskier all-in play in the AI market, which generated 88% of its revenue from its data center chips in the last quarter. Intel stock may look a little cheaper, but it faces much more headwind than AMD.
That’s why I believe AMD is an attractive buy at current prices. The 2023 slowdown spooked some investors, but growth is accelerating again, the AI business is expanding and PC and server makers will likely continue to pull away from Intel.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Intel, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls at Microsoft, short February 2025 $27 calls at Intel, and short January 2026 $405 calls at Microsoft. The Motley Fool has a disclosure policy.
Is AMD Stock a Buy? was originally published by The Motley Fool
