How Will AMD’s AI Business Fare In Q1?

Advanced Micro Devices stock (NASDAQ NASDAQ : AMD) is expected to publish its Q1 FY’24 results toward the end of April, reporting on a quarter that is likely to see the company benefit from an improving PC market and higher demand for artificial intelligence chips. AMD has guided adjusted revenues of between $5.1 billion to $5.7 billion for the quarter, which could translate into a growth of as much as 7% compared to last year. The company has guided gross margins of 52% for the year, marking a 200 basis point increase compared to last year.

AMD’s performance over the early part of 2023 was mixed, with the PC industry undergoing a slump, as the tailwinds such as remote working and learning seen through Covid-19 eased. However, things are likely to pick up a bit in 2024. Over Q1 2024, total PC shipments rose 3.2% year-over-year to 57.2 million units, per Canalys. AMD’s growth could be a bit better, as PC vendors worked through chip inventory that they built through the pandemic over the first few quarters of 2023. This could result in stronger demand for the likes of Intel Intel as PC vendors replenish their inventory. On the server side, AMD could continue to gain share over rival Intel, which faced issues transitioning to smaller, more advanced process nodes. However, there is likely to be a sequential decline, given a seasonal decline in server-processor sales.

We will be watching the performance of AMD’s GPU sales, considering the surge in demand for generative artificial intelligence software. Graphics processing units are becoming the de-facto chips for running AI-related workloads. While AMD’s GPUs have typically been used more for gaming and professional applications compared to Nvidia’s chips, which are the go-to GPUs for accelerated computing applications, AMD is also now focusing on winning over the AI market. The company has announced new chips such as the MI300X chip targeted specifically at large language model training and inference for generative AI workloads. AMD has guided AI-related chip sales of at least $3.5 billion for 2024 and the number could likely be higher given the surging demand for AI applications and the need for alternatives to Nvidia.

AMD stock has seen extremely strong gains of 65% from levels of $90 in early January 2021 to around $150 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in AMD stock has been far from consistent. Returns for the stock were 57% in 2021, -55% in 2022, and 128% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that AMD underperformed the S&P in 2022. In fact, consistently beating the S&P 500 - in good times and bad - has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMD face a similar situation as it did in 2022 and underperform the S&P over the next 12 months - or will it see a strong jump?

AMD stock has seen a meaningful rally over the past year. AMD trades at about 44x consensus 2024 earnings, which is a relatively high multiple. However, the ongoing recovery in the PC market and surge in demand from AI applications could justify this to an extent. While we value AMD stock at about $145 per share, about 5% below the current market price, we will be revisiting our price estimate for the company following Q1 results. See our analysis on AMD Valuation: Is AMD Stock Expensive Or Cheap? for more details on what’s driving our price estimate for AMD. Also, check out our analysis of AMD Revenue for more details on the company’s key revenue streams.

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