The technology sphere finds itself embroiled in a seismic shift, with the realm of artificial intelligence (AI) at the center stage. In a world spinning with innovation and transformation, the semiconductor industry stands as a pivotal enabler, providing the specialized chips that fuel the insatiable computational and data processing demands of AI.
While the stalwart Nvidia (NVDA) has long reigned supreme with its AI accelerators, boasting a lion’s share of the market, a formidable contender has emerged in the form of Advanced Micro Devices (AMD). Once a mere underdog, AMD is now flexing its muscle with products like the MI300 Instinct GPUs, outstripping Nvidia in memory capacity and bandwidth, all the while maintaining cost-efficiency. Behind this renaissance lies AMD’s strategic acquisitions and steadfast dedication to AI chip innovation, solidifying its burgeoning influence in the cutthroat AI landscape.
At present, brokerage firms RothMKM, Wells Fargo, and Melius Research are singing AMD’s praises, anticipating a continued uptrend in the chip stock. As the semiconductor market falters from its recent peaks amidst escalating geopolitical tensions, AMD’s ascendancy in the AI chip domain beckons attention.
Inception and Growth
Flashback to 1969, and Advanced Micro Devices (AMD) emerges as a Silicon Valley upstart, metamorphosing into a semiconductor titan with a market cap of $286.9 billion. Nestling into niches like data centers, embedded systems, gaming, and PC markets, AMD’s claim to fame lies in its pioneering advancements in CPUs and GPUs, epitomized by its Ryzen processors and Radeon graphics cards. Endorsed globally by Fortune 500 entities and research hubs, AMD’s technology enriches everyday experiences, anchoring its stature as a key player in the semiconductor arena.
A cratering 28.4% descent from its all-time high in March at $227.30 characterizes AMD’s current state, with shares marking a modest 10.4% uptick year-to-date. Over the last 52 weeks, the stock has soared by 37.5%, eclipsing the S&P 500 Index’s 23.6% gains and the S&P Semiconductor SPDR’s (XSD) 13.2% returns in the same timeframe.
In terms of valuation, AMD presents a compelling case vis-a-vis its counterparts in the mega-cap AI chip realm. Trading at 50 times forward adjusted earnings, AMD aligns with competitors like Nvidia and Broadcom (AVGO). Yet, its price/sales multiple of 11.2x stands at a judicious discount to both NVDA and AVGO, rendering AMD an enticing prospect in the fierce semiconductor landscape.
Post-Q1 Earnings Saga
Revealing its Q1 earnings snapshot post-close on April 30, Advanced Micro Devices witnessed an 8.9% plunge in its shares during the subsequent trading session. Despite marginally eclipsing revenue and EPS expectations, the chip behemoth’s lackluster fiscal Q2 guidance failed to strike a chord with investors. Revenue ascended by 2.2% annually to $5.5 billion, with adjusted EPS climbing 3.3% to $0.62.
Robust showings in the Data Center and Client segments, marked by 80% and 85% revenue upswings, respectively, were propelled by MI300 AI accelerators and Ryzen/EPYC processors. However, Gaming segment earnings plummeted by 48% due to dwindling console and PC chip sales.
The limelight now shifts to AMD’s forthcoming Q2 earnings announcement on August 6, with revenue projected around $5.7 billion and a margin range of plus or minus $300 million. Eyeing a 6% annual and 4% sequential climb, AMD aims for a non-GAAP gross margin hovering around 53%. Analysts foresee a 17.5% upsurge in Advanced Micro Devices’ Q2 EPS to $0.47.
AMD’s Marching Cadence in AI Terrain
Stepping onto the stage at Computex 2024, AMD unveiled the MI325X AI accelerator, flaunting 288GB of HBM3E memory in a bold bid to dethrone Nvidia. Partnering with tech bigwigs like Microsoft (MSFT), Meta Platforms (META), Dell Technologies (DELL), Hewlett Packard Enterprise (HPE), and Lenovo (LNVGY), AMD’s Instinct MI300X accelerators are poised to carve a niche in AI markets, fortifying its competitive edge.
Further bolstering its AI arsenal, AMD is on the cusp of acquiring Finnish AI startup Silo AI for $665 million in cash. Grappling with the challenge of fortifying robust AI models, AMD aims to leverage Silo AI’s expertise for heightened model development and deployment efficiencies. This acquisition not only bolsters AMD’s software prowess but also signifies a strategic leap to expand its AI footprint, following previous forays like snatching up Mipsology and Nod.ai and injecting over $125 million in various AI firms over the past year.
Prognostications and Praises for Advanced Micro Devices
July 11 witnessed RothMKM and Wells Fargo elevating their price targets for AMD post the Silo AI acquisition. RothMKM’s Sujeeva De Silva envisions the acquisition as a bridge to elite AI frameworks, propelling AMD’s price target to $200 from $180, whilst maintaining a “Buy” rating. Wells Fargo’s Aaron Rakers perceives the acquisition as a strategic impetus to AMD’s open-source AI software acumen, pulsating his target to $205 and upholding an “Overweight” rating on AMD, citing auspicious strategic dividends notwithstanding Silo AI’s minimal interaction with Nvidia’s GPUs.
Simultaneously, Melius Research’s Ben Reitzes prophesizes further growth avenues for the stock. While acknowledging the Silo AI deal may not catapult AMD on a par with Nvidia, Reitzes opines it fortifies AMD’s ecosystem support and generates supplementary business. Beyond this, Reitzes anticipates a windfall for AMD from an impending PC upgrade cycle, buttressed by an aging user base and burgeoning corporate demand, potentially fuelled by AI-based PC sales.
With a collective “Strong Buy” rating, AMD stock boasts favor amongst analysts. Out of 35 analysts tracking the stock, 28 advocate a “Strong Buy,” one proposes a “Moderate Buy,” and the residual sextet lean towards a “Hold” rating.
An average analyst price target of $195.17 spotlights a prospective uptick of nearly 20% from prevailing levels. Meanwhile, a street-high price target of $265 beckons a potential rally of as much as 62.3% for AMD stock.