How Is AMD’s Fledgling AI Business Doing?

Advanced Micro Devices stock (NASDAQ NASDAQ : AMD) recently published its Q1 2024 results which were slightly better than expected. While net income came in at $123 million compared to a net loss in the year-ago period, revenue was up about 2% from a year earlier to $5.47 billion. While AMD has been benefiting from an improving PC market and higher demand for its artificial intelligence chips, the company’s gaming business - which makes chips for consoles and PCs - is facing some headwinds.

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. AMD’s Data Center segment - which includes sales of its server chips as well as the MI300 series AI chips rose by about 80% year-over-year to $2.3 billion. AMD is now projecting AI chip sales of $4 billion for the year, an increase from the $3.5 billion projected back in January. Its very likely that the final number could be a bit higher, given the surging demand for AI applications and the need for alternatives to Nvidia.

AMD’s gaming segment revenues declined 48% year over year to $922 million, while client sales - which include chips sold for PCs and laptops - jumped 85% to $1.4 billion, indicating that the PC slump is finally over. Moreover, AMD says that it is gaining a share of the server CPU market as well, thanks to the AI boom. Central processors are often paired with AI chips in servers and this is driving additional demand for the company. AMD has also been gaining over rival Intel Intel , which faced issues transitioning to smaller, more advanced process nodes.

AMD stock has seen extremely strong gains of 80% from levels of $90 in early January 2021 to around $160 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 mega-cap 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. We value AMD stock at about $163 per share, which is slightly ahead of the current market price. 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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