Advanced Micro Devices (NASDAQ: AMD) stock has recently experienced a notable rally, surging 127% across the past year. This uptick is quite the feat considering the chipmaker’s declining revenue and earnings in recent quarters, triggered by a weakened personal computer market. This prompts a critical question: is investing in AMD advisable given its steep valuation?
It seems that AMD’s price-to-sales ratio has expanded over the last year while its revenue has diminished. Meanwhile, Wall Street analysts collectively forecast a 31% earnings decrease for 2023 to $2.40 per share.
Poised for a Significant Turnaround this Year
Though AMD’s recent performance has been impacted by dwindling PC sales, the outlook for the upcoming year appears promising. Canalys researchers are projecting an 8% surge in PC sales in 2024, a stark contrast from 2023’s 12.4% decline. This impending reversal is set to benefit AMD’s client CPU (central processing unit) business, heavily reliant on PC sales. Throughout 2023, this segment experienced a significant decline, with client revenue plummeting by 40% year over year during the initial nine months of the year.
Attributed to the weak demand for PCs, an oversupply of AMD’s computer processors resulted in the company offering discounts to stimulate sales. This move exerted pressure on margins, leading to a reduction in earnings. However, the tide began to turn as client segment revenue started growing once more, now that the oversupply has been addressed.
In Q3 2023, AMD’s client revenue soared by 42% year over year to $1.45 billion, marking a stark improvement from an operating loss of $26 million in the corresponding period the previous year. Consequently, the anticipated resurgence in the PC market in 2024 should provide the impetus for AMD to break free from its slump.
The burgeoning clientele for its artificial intelligence (AI) chips will serve as another pivotal growth catalyst for AMD. Major players including Meta Platforms, OpenAI, Oracle, and Microsoft have recently announced their deployment of AMD’s premier MI300X AI accelerators.
AMD anticipates that its AI chips could generate revenue in excess of $2 billion in 2024, potentially surpassing the current projections. With the company also forecasting $400 million in Q4 revenue from its data center GPU (graphics processing unit) business, the $2 billion annual revenue projection for 2024 suggests a substantial quarterly revenue increase to $500 million. Moreover, AMD is expected to acquire a significant portion of AI chip supply from its foundry partner, which could spur even more robust growth in the data center GPU business.
A Promising Outlook for Investors
Projections indicate a return to substantial growth for AMD’s revenue and earnings in 2024, followed by another robust year in 2025, as demonstrated in the table below.
|
Year |
Revenue estimate (in $billion) |
Year-over-year change (%) |
Earnings per share estimate |
Year-over-year change (%) |
|---|---|---|---|---|
|
2023 |
$22.7 |
-4% |
$2.65 |
-24% |
|
2024 |
$26.5 |
17% |
$3.83 |
45% |
|
2025 |
$31 |
17% |
$5.16 |
35% |
Source: YCharts and Yahoo! Finance
This positive outlook explains why the company’s forward earnings and sales multiples are currently at relatively appealing levels in comparison to the trailing multiples mentioned earlier in this analysis.
The market is anticipated to further reward AMD’s growth acceleration, particularly in light of its substantial opportunity in the AI chip market. Thus, prudent investors seeking to capitalize on the escalating adoption of AI and the resurgence of the PC market should consider integrating AMD stock into their portfolios before it propels to even greater heights.
Exploring Advanced Micro Devices as an Investment
As potential investors consider whether to buy stock in Advanced Micro Devices, a reconsideration is imperative. While no easy choice, the intricacies of this decision are crucial. The Motley Fool Stock Advisor has recently identified the 10 best stocks for the future, none of which included Advanced Micro Devices. These chosen stocks are projected to yield substantial returns in the years ahead, constituting an indication that AMD might not be the most promising investment in the current market landscape.
The Blueprint for Success
The Stock Advisor service, renowned for its track record of success, has surpassed the S&P 500 return by more than threefold since 2002*. The extensive experience of their analysts provides investors with a straightforward guide for building a portfolio and regularly updates them with two new stock picks each month. Its stellar past performance makes their present assessment highly significant.
A Historical Perspective
Considering the evolving dynamics of the stock market and the consistently changing landscape of technology companies over the past two decades, the historical context suggests that reevaluating one’s investment strategy is prudent. This scrutiny will help determine whether Advanced Micro Devices aligns with one’s risk appetite and investment timeline.
*Stock Advisor returns as of December 18, 2023
Transparency and Past Performance
Given this revelation, and in light of the track record of success of the Stock Advisor service, cautious consideration is needed. Notable names in the tech sector, including Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle, have had positions in and been recommended by The Motley Fool. This necessitates prudent evaluation taking this into account.