Is AMD Stock a Buy? Brighter Days Ahead for the Chipmaker

Brighter days are on the horizon for the chipmaker AMD.

AMD (AMD -0.17%) was once seen as an underdog in the chipmaking world, lagging behind giants like Intel and Nvidia in the x86 CPU and discrete GPU markets. However, in the past decade, AMD's stock price has skyrocketed by about 5,110%, marking its comeback in competition with Intel and keeping pace with Nvidia.

An investment of $20,000 in AMD a decade ago would now be worth over $1 million. Yet, in the last year, its stock performance has leveled off, primarily due to slow growth in the PC market, which has placed a damper on the promising expansion of its higher-growth data center sector. Does this lull signify a great opportunity for long-term investors to buy in?

AMD's Success Against Intel Over the Last Decade

Lisa Su, who became AMD's CEO in 2014, implemented a turnaround strategy that focused on three main areas. First, AMD developed custom accelerated processing units (APUs) that integrated CPUs and GPUs into one chip. These APUs gained traction with console manufacturers like Sony and Microsoft, significantly boosting AMD's enterprise, embedded, and semi-custom (EESC) business while providing funds for its main CPU and GPU operations.

Second, Su pushed AMD to redesign its CPUs, overcoming previous performance issues seen in its older Bulldozer chips. Unlike Intel, which manufactures most of its chips in-house, AMD outsourced its most advanced chips' production to TSMC. This “fabless” approach allowed AMD to outpace Intel, which faced multiple production hurdles and delays in creating smaller, more efficient chips.

Finally, AMD entered the data center market with its EPYC CPUs, Instinct GPUs, and programmable chips through the acquisition of Xilinx in 2022. These advancements helped AMD gain a foothold in a market where Intel had maintained a near-monopoly. As a result, AMD's revenue grew at a compound annual growth rate (CAGR) of 17% from 2014 to 2023.

AMD's share of the x86 CPU market increased from 23.4% to 36.4% between the end of 2014 and the end of 2024, while Intel's share dropped from 76.6% to 61.5% in the same timeframe.

Recent Challenges for AMD

In the first half of 2023, AMD's revenue saw a decline as the PC market cooled. This stagnation followed the industry’s pandemic surge and was exacerbated by challenging conditions in both consumer and enterprise markets. Additionally, sales of older gaming consoles by Sony and Microsoft fell.

However, from mid-2023 onwards, AMD experienced a revenue rebound as the PC market began to stabilize and macroeconomic conditions improved. Recent success is attributed to increased sales of Zen 5 CPUs, Epyc CPUs, and Instinct GPUs targeted for the AI-focused data center market. These three areas have significantly helped offset declines in gaming and embedded chip sales.

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%

Source: AMD. YOY = Year-over-year. EPS = earnings per share.

Additionally, AMD benefited from Intel's missteps. Intel fell behind TSMC in creating advanced manufacturing processes and frequently changed leadership, struggling with chip shortages and production issues. To maintain its competitiveness in the AI market, AMD offered its Instinct GPUs at lower prices compared to Nvidia’s higher-priced H100 GPUs. As of the third quarter of 2024, over half of AMD's revenue came from its data center chips.

Future Outlook for AMD

It appears that AMD has gone past the worst part of its cyclical slowdown. The company anticipates a 22% year-over-year revenue increase for the fourth quarter, with an adjusted gross margin projected at 54%. Analysts forecast a 13% increase in revenue and a 25% increase in adjusted earnings per share (EPS) for the entire year. Looking ahead to 2025, they predict revenue and adjusted EPS growth of 27% and 56%, respectively.

These are impressive growth rates for a stock trading at 26 times its projected earnings. In comparison, Nvidia and Intel trade at 33 and 23 times projected earnings, respectively. While Nvidia is growing faster than AMD, it carries a higher risk concentrated in the AI sector, which generated 88% of its revenue from its data center chips last quarter. Though Intel’s stock may appear cheaper, the company faces significant challenges compared to AMD.

Therefore, AMD seems to be a strong buy at the current price point. The slowdown in 2023 may have alarmed some investors, but growth is ramping up once more, its AI business is expanding, and it seems poised to attract PC and server manufacturers away from Intel.

AMD, Stocks, Buy