AMD was dealt a reality check after the last earnings update.
Shares of Advanced Micro Devices (AMD 3.70%) have pulled a stunning round trip so far in 2024. Following management's increasingly upbeat commentary on sales related to artificial intelligence (AI) early in the year, the stock soared higher.
But then reality started to settle in after the first-quarter update, and shares are now down about 30% from those peaks, reached early in the spring.
If you've been following along, there's always been a clear-cut reason to be optimistic about AMD -- and a clear-cut reason to be skeptical. Is it time to buy the stock dip?
AI is gonna be huge -- what happened?
Entering 2024, CEO Lisa Su and her team were getting increasingly optimistic about AI chip sales. Su has stated an expectation for $2 billion in accelerated-computing sales (accelerated computing being the real trend behind the scenes, not simply AI). But then in January, the outlook was raised to $3.5 billion.
For a company that had $22.8 billion in sales in the last reported 12-month stretch, AI chips thus represent a significant -- but not massive -- new market. The new MI300 accelerated-computing system is reportedly AMD's fastest product to ramp up to $1 billion in revenue, reaching that status in just two quarters.
Suffice to say investors were excited.
But the reality check? Despite the glowing reviews of AMD AI, that $3.5 billion outlook for 2024 AI sales wasn't raised again during the first-quarter update.
And the guidance for the second quarter was also a bit lackluster. At the midpoint of guidance, the expectation for the quarter is for revenue of $5.7 billion, up 4% from the prior quarter and just 6% from the previous year -- when AMD results were still down in the dumps from the bear market.
Hopes are (rightfully) diminishing that AMD data-center AI revenue can go parabolic like Nvidia's has.
As I've written numerous times since the completed acquisition of Xilinx in early 2022, the most important reason AMD could continue to be a winning semiconductor stock is rising profit margins.
This was the reason I was skeptical about AMD stock rallying aggressively in recent months. Hidden behind all of management's AI talk the last few quarters was a more somber message about needing to get profit margins back on track.
Indeed, the bear market did a number on AMD -- especially with cratering consumer spending on PCs and laptops (its client revenue segment). The segment's operating profit was $86 million in the first quarter, for a margin of only 6%. There's tremendous room for improvement as consumer PC spending stabilizes this year.
Data center AI chips aren't quite providing the massive offset to weakness in other parts of the business, like embedded (Xilinx) and gaming (video game consoles). But what AMD's data center lacks in revenue-growth sizzle, it does make up for in profit-margin expansion. Operating margins were 23% in the first quarter, versus a meager 11% the year prior.
AMD still has a way to go until it returns to anywhere 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/, though maybe not a particularly amazing value.
Let's just pretend like the new all-time highs in the stock this spring never happened at all, rather than call this a dip. I'm a shareholder, patiently waiting to see how this story pans out, but I'm not buying at this time.
Nicholas Rossolillo and his clients have positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
(AMD) is an American multinational corporation and semiconductor company based in Santa Clara, California, that develops computer processors and related technologies for business and consumer markets.
still has a way to go until it returns to anywhere 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/, though maybe not a particularly amazing value.
The Wall Street Journal tracks 48 analysts covering AMD stock, and 33 have given it the highest possible buy rating. A further six are in the overweight (bullish) camp, and nine recommend holding. Not one of them recommends selling.
Industry forecasts support her assessment. The AI sector is expected to hit $184 billion in 2024, up from $136 billion last year and expanding to $827 billion by 2030. This industry growth is reflected in the sales of AMD's AI chips, which are steadily rising.
Investors have been cautious on AMD shares (AMD) lately, sending them down 26% from their March peak - in part due to concerns about Nvidia Corp.'s (NVDA) decision to price its new Blackwell chip lineup potentially lower than many analysts were expecting, in bid to spur adoption.
What's The Opportunity In Advanced Micro Devices? According to our valuation model, the stock is currently overvalued by about 24%, trading at US$203 compared to our intrinsic value of $163.65. This means that the opportunity to buy Advanced Micro Devices at a good price has disappeared!
That's not unrealistic, and the AMD share price will probably revisit $200, eventually. Remember, the stock has a 52-week high of $227.30. Curtis expects to see a strong “upcycle” in the semiconductor market, and that's a realistic assumption. Investors shouldn't get so excited that they over-invest in AMD stock.
According to the latest long-term forecast, AMD price will hit $250 by the end of 2025 and then $300 by the middle of 2026. AMD will rise to $350 within the year of 2027, $450 in 2028, $500 in 2029 and $600 in 2032.
Based on 34 Wall Street analysts offering 12 month price targets for Advanced Micro Devices in the last 3 months. The average price target is $192.32 with a high forecast of $265.00 and a low forecast of $140.00. The average price target represents a 16.93% change from the last price of $164.47.
While AMD demonstrates growth potential and has a smaller market cap, Nvidia's market leadership and profitability metrics make it a formidable player in the semiconductor industry. Nvidia is also more likely to deliver sustained value to investors in the long run.
AMD expects almost $26 billion in revenue this year, an improvement from 2023, when its top line fell 4% to $22.7 billion. More importantly, analysts predict revenue will increase even faster in 2025, followed by another year of double-digit growth in 2026.
As of 2024-05-31, the Fair Value of Advanced Micro Devices Inc (AMD) is 17.26 USD. This value is based on the Peter Lynch's Fair Value formula. With the current market price of 166.75 USD, the upside of Advanced Micro Devices Inc is -89.6%.
Is AMD stock a Buy, Sell or Hold? AMD stock has received a consensus rating of buy. The average rating score is and is based on 84 buy ratings, 14 hold ratings, and 0 sell ratings.
AMD shares may be expensive, but the company remains a great option if you're looking for a long-term investment. Its stock has risen nearly 3000% over the last decade. With chip demand likely to increase as different sectors of tech expand, the company could continue on a similar trajectory.
Historical daily share price chart and data for AMD since 1983 adjusted for splits and dividends. The latest closing stock price for AMD as of May 30, 2024 is 166.75. The all-time high AMD stock closing price was 211.38 on March 07, 2024.
Although AMD is likely a buy long-term, its underperforming segments may cast doubt on its near-term performance. However, the part of AMD that is tied to the AI chip market shows rapid growth. As AI chips become a larger part of the business, they should boost the company's revenue growth over time.
And generative AI spending is forecast to increase 86% annually through 2027. Companies that can take advantage of this could see their revenue and earnings jump. Advanced Micro Devices (AMD 3.70%) is one such company that could benefit from AI's growth in multiple niches.
While AMD is currently trailing NVDA by a few years, it's poised to capture a portion of the lucrative AI market. There's a strong possibility that AMD could replicate NVDA's growth trajectory over the next couple of years.
As of 2024-05-29, the Fair Value of Advanced Micro Devices Inc (AMD) is 17.26 USD. This value is based on the Peter Lynch's Fair Value formula. With the current market price of 171.61 USD, the upside of Advanced Micro Devices Inc is -89.9%.
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