Although the semiconductor stock fell sharply following the release of the company's latest earnings report, investors shouldn't lose sight of the bigger picture.
Advanced Micro Devices' (AMD 0.19%) The rise in stock prices driven by artificial intelligence (AI) came to a screeching halt in 2024. The company's stock has fallen 29% since early March, when it was trading at a 52-week high, but the company's latest results beg to differ. I'm going to help prevent it from slipping.
AMD announced its Q1 2024 results on April 30th, and investors hit the panic button. Let's see why this happened.
Results weren't strong enough to justify AMD's high valuation
AMD reported first-quarter revenue of $5.47 billion, which was only a 2% increase over the same period last year. The company's non-GAAP earnings also grew at a modest pace of $0.62 per share during the quarter, up just 3% year over year. Analysts had expected earnings of $0.62 per share on revenue of $5.48 billion, meaning AMD narrowly missed bottom line estimates and missed revenue expectations.
The coaching didn't inspire much confidence either. AMD expects second-quarter revenue to be $5.7 billion, an increase of just 6% year-over-year. Although second-quarter revenue forecasts show AMD's growth accelerating slightly, Wall Street had expected his revenue to be slightly higher at $5.73 billion.
Trading at a hefty 218x price-to-earnings ratio, AMD needed to deliver even stronger growth to justify its rich multiple. The company was able to achieve that in two of its business segments that are already benefiting from AI penetration, but weakness in two of its other business segments weighed on its financial performance.
Specifically, AMD's gaming revenue fell 48% year over year to $922 million. This sharp decline was the result of weak demand for AMD's semi-custom chips. microsoft and Sony, sales of the company's gaming graphics cards also slumped. The decline in this sector is not surprising, as sales of personal computers (PCs) equipped with gaming graphics cards were weak last year.
Furthermore, the video game market was flat last year. However, market research firm Newzoo expects console sales to improve this year. Therefore, AMD is likely to see gradual improvement in gaming revenue as the year progresses.
Meanwhile, the company's revenue from its embedded division fell 46% year over year to $846 million. AMD's embedded processors are deployed in a variety of industries, from automotive to industrial, networking, storage, and more. AMD notes that customers are using up existing inventory in this market, which explains why demand for its embedded chips has been weak recently.
However, AMD claims that the momentum of its design wins in the embedded market remains strong, which means its embedded processors will be selected for inclusion in more products in the future. Once these products go into mass production, AMD should ideally see an improvement in demand for its embedded processors. Especially considering that AMD claims its new products can tackle AI workloads faster than previous generation processors.
This brings us to two segments where AMD is currently experiencing impressive growth thanks to the growing adoption of AI, and where the company's growth is likely to definitely accelerate in the future.
These companies are reaping significant benefits from AI adoption
AMD reported record revenue of $2.3 billion in its data center business last quarter. This is a staggering 80% increase over the same period last year. The company attributes this impressive growth to the surge in demand for AI GPUs (graphics processing units) and server processors.
The chip giant notes that shipments of its MI300X AI accelerator have increased significantly, adding: “This trend is driven by the 100+ enterprise and AI customers actively developing or deploying MI300X. is likely to continue in the future.” AMD has already sold $1 billion worth of these chips in the past two quarters and expects data center GPU sales to reach $4 billion by the end of this year.
This marks an improvement in the company's quarterly revenue run rate from the data center GPU market. It's also worth noting that AMD sold $400 million worth of AI accelerators in the fourth quarter of 2023, when it started selling new AI chips. The company also forecast sales for the division in 2024 of $4 billion, double the $2 billion it initially expected and higher than the $3.5 billion it announced in January.
This means that AMD's potential revenue pipeline from AI chip sales is increasing at a good pace, suggesting that the company's data center business may continue to grow.
Meanwhile, AMD's client business revenue also increased by an astonishing 85% year-on-year to $1.4 billion. The company is currently seeing an upturn in demand for its PC processors, driven by a recovery in this market and rising demand for AI-enabled PCs. The company offers dedicated AI accelerators in its CPUs, making it well-positioned to take advantage of the upcoming AI PC boom. CEO Lisa Su said:
We believe AI is the biggest tipping point in PCs since the Internet, with the ability to deliver unprecedented productivity and ease of use improvements. We are working closely with Microsoft and our broad ecosystem of partners to enable next-generation AI experiences powered by Ryzen processors. More than 150 ISVs will be developing for AMD AI PCs by the end of the year.
Investors can expect AMD's client business to see solid growth in the coming years, as market research firm Canalys expects AI PC shipments to grow at a 44% annual rate through 2028.
Overall, the data center and client business generated 67% of the company's revenue last quarter. They are very healthy so far and could move the needle in a big direction for AMD thanks to AI-related catalysts. Given the potential turnaround in the other two segments, AMD's revenue growth is estimated to increase 13% this year from last year's $22.7 billion level, with momentum in 2025 and 2026. It is easy to see why this is expected to increase.
Even better, analysts predict that AMD's revenue will grow at an annual rate of 25% over the next five years. That could actually happen thanks to the catalysts discussed above, which means AMD's earnings could reach $8.09 per share by the end of 2028 (up from 2023 per share). (Based on profit of $2.65).
AMD's average five-year forward earnings multiple is 33x. Multiplying this by his expected earnings in 2028 gives the stock a price of $267, giving him a potential upside of 78% from current levels. That's why investors would do well to use AMD's exit as a buying opportunity. If this AI stock starts growing at a faster pace, it could be a long-term winner.