Speculation has run rampant as the once high-flying Advanced Micro Devices (NASDAQ: AMD) sees its shares descend from the upper stratosphere. Following a meteoric ascent to $227 per share in early March, the stock has undergone a controlled descent, shedding nearly 15% of its value. While the jaw-dropping valuation possesses a certain allure, recent market corrections have placed the company within reach for a broader swath of investors. The burning question now echoes across trading floors and investor conferences alike: Is now the opportune moment to seize the reins and ride the AMD wave, or is it wiser to play the waiting game from the sidelines?
The Current State of AMD
Despite the recent market headwinds, AMD shares have soared by a staggering 85% over the past 12 months. A significant driver of this upsurge can be traced to the burgeoning interest in its line of AI chips, particularly the Instinct MI300 Series Accelerators. Although facing stiff competition from the likes of Nvidia (NASDAQ: NVDA), which lays claim to approximately 80% of the market, market research from MarketDigits maintains a bullish forecast, projecting a robust 38% compound annual growth rate for the AI chip market until 2030. This upward trajectory should enable AMD to flourish even with a modest market share.
Notably, the financial results manifest signs of a recuperating giant. Revenue for the fourth quarter of 2023 surged by 10% year-on-year to reach an impressive $6.2 billion. The data center segment, encompassing AI chips and contributing $2.3 billion to its revenue stream, witnessed a remarkable 38% annual growth.
While acknowledging this progress, it would be remiss to discount the contributions from AMD’s other business segments. The client-side saw the most rapid growth, with fourth-quarter revenue swelling by 62% year-on-year to reach $1.5 billion. Even as the gaming and embedded segments experienced slight declines, they were overshadowed by AMD’s overall fourth-quarter resilience.
Despite the company’s reluctance to provide full-year guidance for 2024, analysts remain bullish, forecasting a robust 23% revenue growth this year and a further 26% surge in 2025. These projections are poised to catapult net income to greater heights, potentially igniting momentum in AMD’s stock price trajectory.
Challenges Persist for AMD
The data for the full-year in 2023 paints a more somber picture, reflective of the prevailing cyclical downturn permeating the industry. The reported revenue of $23 billion represents a stark 4% decline from previous levels, with only the data center and embedded segments registering growth during this period.
This downturn has had a perceptible impact, sharply curtailing operating income, and leading to a 22% reduction in adjusted net income that now hovers at a modest $4.3 million.
Furthermore, a scrutiny of AMD’s earnings multiple might not augur well for prospective investors. With a lofty price-to-earnings (P/E) ratio hovering around 350, the figure primarily reflects plummeting profits rather than an accurate valuation metric. Although the forward P/E ratio of 48 appears more rational, it still positions the stock as relatively expensive, especially when juxtaposed against competitors like Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM), who have also ventured into AI-ready chip development.
Assessing the Investment Landscape
Considering the bright prospects of the AI chip market alone, AMD emerges as an enticing option for investors. The burgeoning demand for these chips is expected to propel revenue and income to new heights. The positive momentum witnessed in the fourth quarter is indicative of this favorable trajectory.
While acknowledging the premium valuation compared to industry peers like Nvidia and other emerging AI competitors, the anticipated meteoric growth in the AI chip realm presents a rising tide that could lift all boats. Armed with this knowledge and factoring in AMD’s diversified revenue streams, the recent pullback in the stock price may well signify an enticing buying opportunity, steering clear of the fear-mongering that occasionally surrounds semiconductor stocks.