Advanced Micro Devices Stock Analysis Is Advanced Micro Devices Primed to Soar?

By: Alex Freidmen

The technology sector has been abuzz with the artificial intelligence (AI) revolution for over a year. What started with the massive widespread explosion of Microsoft (MSFT)-backed generative AI company OpenAI, parent of ChatGPT, in November 2022 has snowballed into a technological zeitgeist. So, as forecasts for generative AI remain upbeat for the upcoming years, the companies that create the architecture on which AI is based are also thriving.

Notably, semiconductor chips remain a critical component that underlies any stable AI system. In fact, according to a report by the Semiconductor Industry Association, total sales from the semiconductor industry could reach $1 trillion by 2030, up from $574.1 billion in 2022 – representing a CAGR of 7.2%.

Unsurprisingly, stocks in this industry with a foothold in the AI industry have been on a tear. Top semiconductor funds like the iShares Semiconductor ETF (SOXX) and VanEck Semiconductor ETF (SMH) are up 50% and 59% over the past year, respectively – outperforming the broader Nasdaq Composite’s ($NASX) own impressive 37% rise by a considerable margin.

Among this group, semiconductor giant Advanced Micro Devices (AMD), more popularly known as AMD, stands out as a strong long-term pick among analysts. Here’s what you need to know about AMD, including three reasons why the stock is a strong buy right now.

The AMD Story

Founded in 1969 and headquartered in Santa Clara, Calif., AMD is a behemoth of the semiconductor industry, commanding a market cap of $256.27 billion. The company is one of the world’s largest suppliers of microprocessors and related technologies for the computing and graphics industries. AMD’s products are used in a wide range of applications, including personal computers, servers, workstations, embedded systems, and gaming consoles. AMD stock has turned in a stellar performance over the past year, gaining a whopping 130%. That outperforms not only the broader tech sector and industry-specific ETFs like SMH and SOXX, but also rival chip giants like Broadcom (AVGO), Taiwan Semiconductor (TSM), and Intel (INTC).

AMD stock performance

However, prospective investors who believe that they have missed the rally in AMD shouldn’t worry, as there appears to be substantial upside potential still remaining from current levels.

Strong Earnings Performance

Investors were disappointed after the company’s Q2 results missed the mark, but AMD’s results for the third quarter were impressive, as both revenue and earnings rose year-over-year and surpassed analyst expectations. In Q3 2023, AMD reported revenues of $5.8 billion, up 4% from the prior year. Robust client segment revenue of $1.5 billion, up 42% YoY, was the main catalyst for AMD’s overall revenue growth, driven primarily by higher Ryzen mobile processor sales. Although its key gaming segment reported an 8% yearly decline in revenues to $1.5 billion, weakness in that division was not unexpected, due to the cyclical nature of console demand. Adjusted EPS for the quarter rose to $0.70, surpassing the consensus estimate of $0.68. Notably, the company’s EPS has topped expectations in four out of the past five quarters. Although net cash from operating activities fell to $421 million in Q3 2023 (vs $965 million in Q3 2022), AMD’s liquidity position remains strong. The company ended the quarter with a cash balance of $3.56 billion, significantly above the current portion of the long-term debt balance of $752 million.

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AMD Q3 earnings

Promising Growth Prospects

Among tech stocks, AMD stands out as a top growth pick. Forward revenue growth is pegged at 17.58%, more than doubling the sector median. Likewise, forward EBITDA growth of 13.19% easily tops the sector median of 6.62%. Looking even further out, forward long-term EPS growth projections stand at 31.95% – crushing the sector median of 13.31%. These growth forecasts should be supported by new launches and innovations. Notably, to narrow the gap with Nvidia (NVDA) – the undisputed leader in the $1.3 trillion generative AI market – AMD recently introduced its most powerful GPU to date, the MI300X, made specifically for generative AI. The MI300 chips have been off to a strong start for AMD, with the company now forecasting 2024 sales of about $2 billion. This does not seem too far-fetched, as the company revealed that tech titan Microsoft is already adopting the chips to manage ChatGPT’s workloads. To further burnish its AI credentials, the company acquired open-source AI software expert Nod.ai and AI software company Mipsology in the third quarter. While the segment is lagging now, another reason to like AMD is its dominant position in the gaming console processors market, with an 83% share. Notably, AMD is currently the world’s leading chip designer as far as chiplet architecture and 3D stacking is concerned, adding diversity to its portfolio. It is also the exclusive chip supplier for Sony’s PlayStation 5 and Microsoft’s Xbox Series X|S – and despite a sequential revenue decline from the gaming segment in the latest quarter, this division still accounted for an increased percentage of revenue overall due to higher Radeon GPU sales. Finally, the company’s dominant status in the high-performance computing market also bodes well for its growth prospects. With over 640 EPYC processors operational presently, and another 200 to be added by the end of 2023, demand appears to be strong – as indicated by adoption among large corporations like Banco do Brasil (BDORY), BNP Paribas (BNPQY), and Uber (UBER) in Q2 2023.

Analyst Sentiment

Analysts are upbeat about the outlook for AMD’s stock, with an average “Strong Buy” rating and a mean target price of $144.39. The shares have already run past that mean price target, although the Street-high target of $200 implies an upside potential of about 23% from current levels. All things considered, while AMD may not necessarily double in value again this year, it seems reasonable to bet on more upside for the shares going forward – potentially up to that Street-high target, or even beyond. Out of 30 analysts covering the stock, 24 have a “Strong Buy” rating, 1 has a “Moderate Buy,” and 5 have a “Hold” rating.

AMD analyst sentiment