AMD's Strategic Moves in AI: A Buying Opportunity Amidst Market Shifts

AMD Stock Slides: Are There Cracks in the AI Infrastructure Story?

When it comes to chips for artificial intelligence (AI), Advanced Micro Devices (NASDAQ: AMD) is still forging a path behind the industry titan Nvidia. Despite this, AMD is partaking in the broader AI infrastructure expansion as clients seek alternatives in a bid to counter Nvidia’s dominance and keep it on its toes.

While AMD has showcased robust AI-related growth, the stock has seen a sell-off, leaving shares just barely above water this year. This article will delve into AMD’s third-quarter performance to determine if current trends signal a buying opportunity or if we should brace for potential issues.

Data-Center Growth

In the third quarter, AMD reported an 18% year-over-year revenue increase, edging up to $6.8 billion. The adjusted earnings per share (EPS) rose by 31% to reach $0.92. This growth rate marks a notable acceleration when juxtaposed against the previous quarter, where sales only improved by 9% alongside a 19% rise in adjusted EPS.

The data center segment was the shining star, experiencing an impressive revenue surge of 122% year-over-year, translating to $3.5 billion—up 25% sequentially. This growth stemmed largely from the sales of its Instinct graphics processing units (GPUs) and EPYC central processing units (CPUs). Notably, AMD has made significant inroads, particularly its EPYC CPUs, which have seen extensive deployment across major cloud service providers, including Microsoft and Meta Platforms, along with enterprise customers like Adobe, Boeing, and Nestlé.

Moreover, the client segment also posted a strong 29% growth, sitting at $1.9 billion, propelled by the demand for AMD’s Zen 5 processors. However, not all segments thrived—AMD’s gaming revenue drastically plummeted by 69% to $462 million, and the embedded segment saw a decline of 25% to $927 million. In terms of fiscal health, AMD’s adjusted gross margins rose by 250 basis points to 53.6%, reflecting positive trends sequentially as well.

The quarter also saw AMD generate free cash flow of $496 million, closing with net cash and short-term investments of $4.5 billion and debt standing at $1.7 billion. The company has optimistic guidance for Q4, projecting revenue around $7.5 billion (give or take $300 million)—a radical growth of 22% at the midpoint, indicating an ongoing acceleration. Significantly, its full-year GPU data center revenue forecast has shifted upward from over $4.5 billion to now exceeding $5 billion.

As AMD peers toward 2025, it maintains an optimistic outlook on data-center growth, citing that firms are continuously investing heavily to build robust infrastructures capable of supporting AI workloads. Furthermore, there is a gradual expansion of workloads being run through its GPUs.

AMD Data Center Growth AMD’s growth trajectory continues amidst AI demand.

Is Now the Time to Buy the Dip?

Similar to Nvidia, AMD’s growth is predominantly steered by persistent demand emanating from the build-out of AI infrastructure. Notably, the company has found more success in AI inference, although it has made some commendable inroads into large language model (LLM) training. It may be unlikely for AMD to contest Nvidia’s lead in the market, but it is certainly establishing a niche it can thrive in. The rapid expansion of the AI infrastructure market presents ample opportunity for AMD—gaining even a negligible share could translate to substantial growth in the future.

The upcoming acquisition of ZTE Systems, which specializes in designing and building server, storage, accelerator, and other data center equipment, positions AMD to more effectively compete in the data center realm. This acquisition is set to facilitate offering end-to-end system solutions that integrate its GPUs, CPUs, and networking technology, enabling faster deployment—crucial for clients racing to enhance their data center capabilities.

From a valuation standpoint, AMD trades at a forward price-to-earnings ratio (P/E) of 27.5 times the analyst estimates for the forthcoming year. Given the promising growth opportunities that lie ahead, this appears to be a relatively reasonable valuation.

Though Nvidia remains my preference in this arena due to its exceptional growth rate, I do believe AMD stands to gain from the burgeoning AI-driven data center installations. The ZTE acquisition could further solidify its strategic positioning for enhanced market penetration. Therefore, I advocate for investors to consider purchasing the stock during this recent dip, as the evidence suggests there are no visible fissures in AMD’s AI infrastructure narrative.

Don’t Miss This Second Chance at a Potentially Lucrative Opportunity

Have you ever felt like you missed out on investing in the most successful stocks? Now might be your moment.

Occasionally, expert analysts issue a “Double Down” stock recommendation for companies poised to soar. If you’ve been worried about having missed your chance, seizing the opportunity before it’s too late is crucial. Consider the following statistics:

Amazon: A $1,000 investment when we doubled down in 2010 would now be worth $22,292!*
Apple: Investing $1,000 when we doubled down in 2008 would have grown to $42,169!*
Netflix: Early investors who doubled down in 2004 with $1,000 could now be sitting on $407,758!*

Currently, we’re issuing “Double Down” alerts for three exceptional companies; this may be one of your last chances to invest wisely before the next surge.

*Stock Advisor returns as of October 28, 2024.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook, and sister of Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board of directors. Geoffrey Seiler holds no positions in the mentioned stocks. The Motley Fool endorses and recommends Adobe, Advanced Micro Devices, Meta Platforms, Microsoft, and Nvidia, while also recommending Nestlé.