AMD: Accelerating Revenue Growth Ahead
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Summary:
- Advanced Micro Devices, Inc. is positioned as a challenger to Nvidia in the data center AI chip market, with a promising long-term growth outlook.
- Q2 results showed 115% YoY growth in data center revenue, while other segments faced headwinds, impacting overall growth.
- AMD’s Q3 guidance indicates 16% YoY revenue growth, driven by AI and stabilization in gaming and embedded segments.
- Despite the high valuation, AMD’s solid financial performance and growth prospects make it a buy for long-term investors.
Javier Lizarazo Guerra
Investment Thesis
The main Advanced Micro Devices, Inc. (AMD) thesis is as a challenger to Nvidia (NVDA) in the lucrative market for data center AI chips. The stock price has been decreasing towards a more investible valuation. There have been some headwinds in other of its businesses, preventing stronger revenue growth in the near-term, but which therefore could become tailwinds as those businesses improve or stabilize, with stronger growth already expected in Q3.
Background
In previous coverage, AMD was upgraded to buy as a long-term rating, but remained more cautious about the near term. AMD had a decent outlook for improved long-term growth, warranting the upgrade, but the valuation was quite high.
Q2 results
AMD Q2 revenue of $5.8B was up 9% YoY. The highlight was 115% growth in the data center to $2.8B. It was also up 21% QoQ.
As alluded to, AMD has seen weakness in other parts of its business, lowering the overall growth rate. While client revenue of $1.5B was up 49% and 9% QoQ, continuing its recovery, gaming revenue of $0.65B was down 59% YoY and 30% QoQ due to lower semi-custom revenue. In addition, embedded revenue of $0.9B was down 41% YoY, but stable QoQ.
Gross margin was 49%, operating income was $0.27B and EPS $0.16, all GAAP-based. Non-GAAP gross margin was 53%, operating income $1.3B and EPS was $0.69, up 11%.
Guidance
Q3 revenue of $6.7B is expected, representing 16% growth YoY and 15% QoQ.
AMD has further increased its AI guidance to $4.5B for the year. Its Q2 sales were $1B and $1.6B for the first half. The guidance suggests a continued ramp with about $3B revenue expected in the second half, about double its first half results. This also means AMD might exit 2024 at about a $7B run rate, confirming the thesis of AI as a growth driver.
This seems to confirm the thesis of stronger revenue growth from the continued ramp of Instinct 300 series as gaming and embedded revenue stabilize.
Business updates
AMD announced at Computex an annual Instinct roadmap. For 2025, AMD expects CDNA 4 to deliver up to 35x inference performance over CDNA 3. AMD also recently announced it would be converging its CDNA and RDNA architectures to one UDNA architecture, although it didn’t disclose the precise timeline. AMD said developers had been asking for this. On the other hand, gaming and data center chips have different requirements, as the data center is primarily focused on AI workloads.
For the PC, AMD announced the AMD Ryzen AI 300 Series. The AMD Ryzen 9000 series for client launched recently. AMD further announced that next-gen Turin Epyc CPUs will be available in the second half of 2024.
Overall, AMD has a competitive product portfolio, which should likely allow it to at least maintain its current market position. Nevertheless, the competition remains strong as well. For example, Nvidia with its upcoming Blackwell GPU, for which it has touted an up to 5x increase in performance.
On the CPU side, Intel (INTC) is strongly improving its competitiveness, both in client and data center. In mobile with Lunar Lake, manufactured using TSMC’s (TSM) N3 process node, ahead of the N4 node which AMD uses, and on the desktop its upcoming Arrow Lake CPUs are also expected to be using N3. In the data center, Intel has been catching up since 2021, after falling behind in 2019, and seems likely to achieve parity (both in terms of process node and core count) with its upcoming Granite Rapids launch in September.
Valuation
Based on the non-GAAP Q2 earnings, the run rate P/E multiple is about 50x. However, with the ongoing growth, with a 15% revenue increase QoQ in Q3 already, the forward consensus multiple is 41x. This still is a high valuation, and, therefore, in the near-term downside might be possible.
Looking further out, for 2025 P/E would approach 25x based on $5.41 EPS.
Risks
Besides the valuation, and perhaps general concerns about the long-term growth of AI (although here AMD has the potential for market share gains), the reported GAAP EPS is much lower, which implies a higher GAAP P/E multiple.
Investor Takeaway
AMD delivered a solid Q2. However, the AMD investment case is a bit longer-term due to the current valuation more than pricing in these results. Contrary to Intel, though, AMD delivered solid guidance for Q3. AMD upgraded its AI GPU revenue outlook as well, with revenue doubling in the second half compared to the first. Given this Instinct revenue trend and likely stabilization in gaming and embedded, these results could likely continue into 2025. This seems to confirm the overall thesis remains on track.
Since previous coverage, AMD stock has declined a bit further, which means it has become incrementally more investible. Although the valuation remains relatively elevated, the revenue growth should bring this down. Combined with the financial performance, the stock remains a buy.
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