Is AMD Stock a Buy?

There are promising signs for Advanced Micro Devices (AMD) as it looks to carve out a bigger share of the semiconductor market.

AMD was once an underdog in the semiconductor industry, falling behind leaders like Intel and Nvidia in the markets for x86 CPUs and discrete GPUs. However, over the last decade, AMD's stock has skyrocketed by around 5,110%. This impressive growth transformed a $20,000 investment into over $1 million. Nevertheless, in the past year, AMD's stock price has remained relatively stagnant due to a decline in the PC market, which has offset its growth in the more lucrative data center segment.

AMD's Rise Over the Past Decade

The turnaround for AMD began under the leadership of CEO Lisa Su, who took the helm in 2014. Her strategies focused on key areas to enhance the company's competitive position. First, AMD introduced custom accelerated processing units (APUs) that combined CPUs and GPUs on a single chip. These chips became popular among gaming console manufacturers, such as Sony and Microsoft, and contributed significantly to AMD's growth and revenue.

Second, AMD redesigned its CPU lineup to improve the performance issues faced by its earlier generation of chips. Rather than manufacturing most of its chips in-house, AMD adopted a fabless model, outsourcing production to TSMC. This strategy allowed AMD to leap ahead of Intel, which faced multiple production challenges and delays.

Finally, AMD made significant inroads into the data center market with its EPYC CPUs and acquisition of Xilinx in 2022. This enabled AMD to effectively compete with Intel, which had previously held a near monopoly in this market. Through these efforts, AMD has achieved a compound annual growth rate (CAGR) in revenue of 17% between 2014 and 2023.

According to PassMark Software, AMD's x86 CPU market share increased from 23.4% in Q4 2014 to 36.4% in Q4 2024, while Intel's share dropped from 76.6% to 61.5% over the same timeframe.

Recent Developments for AMD

The situation for AMD took a dip in the first half of 2023 due to a cooling PC market. This slowdown followed the rapid growth the industry experienced during the pandemic and worsened due to macroeconomic challenges affecting both consumer and enterprise sectors. Additionally, sales of gaming consoles from companies like Sony and Microsoft saw a decline.

However, AMD's revenue rebounded in the latter half of 2023 as the PC market began to stabilize. With increasing demand for new Zen 5 CPUs, EPYC server chips, and Instinct GPUs tailored for artificial intelligence applications, AMD's growth regained momentum. These developments helped to balance out declines in its gaming and embedded chip sales.

The table below illustrates the growth metrics for AMD:

Metric	Q3 2023	Q4 2023	Q1 2024	Q2 2024	Q3 2024
Revenue Growth (YOY)	4%	10%	2%	9%	18%
Adjusted Gross Margin	51%	51%	52%	53%	54%
Adjusted Operating Margin	22%	23%	21%	22%	25%
Adjusted EPS Growth (YOY)	21%	12%	3%	19%	31%

AMD's ability to capitalize on Intel's struggles also played a crucial role in its success. Intel lagged behind in chip production and has gone through multiple leadership changes, which led to confusion and mismanagement. AMD managed to capture a significant portion of the AI market by pricing its Instinct GPUs competitively compared to Nvidia's more expensive offerings.

Future Outlook for AMD

Looking ahead, AMD appears to have navigated the worst of its recent downturn. For Q4 2023, the company anticipates a revenue increase of around 22% compared to the previous year, with an expected adjusted gross margin of 54%. Analysts forecast a full-year growth of 13% in revenue and 25% in adjusted earnings per share (EPS) for the year 2024, with predictions of 27% revenue growth and 56% EPS growth in 2025.

These growth rates are impressive, especially when considering AMD's current trading multiple of 26 times forward earnings. In comparison, Nvidia and Intel currently trade at 33 and 23 times forward earnings, respectively. While Nvidia poses a higher risk with its heavy dependency on the AI market, Intel faces multiple headwinds that could hinder its recovery.

In conclusion, AMD presents a compelling investment opportunity at its current price point. Although 2023's growth slowdown caused concern for some investors, the company is now accelerating its growth once again, benefiting from an expanding AI business and continuing to attract customers away from Intel.

AMD, Stocks, Growth