AMD Is Back In The Buy Zone (Rating Upgrade)

Summary:

• On the back of a double-digit decline in its stock over the last month or so, Advanced Micro Devices, Inc. has seen a sizeable increase in its 5-year expected CAGR return.
• Technically, AMD may slide to low-$100s in the near future.
• However, AMD’s AI-powered hypergrowth in the Data Center business and robust product roadmap render AMD stock an enticing investment.

Introduction

In light of its Q3 2024 report, I downgraded semiconductor giant Advanced Micro Devices, Inc. (NASDAQ:AMD) stock to a “Hold” rating, citing its inadequate long-term risk/reward:

In Q3, AMD beat consensus estimates but failed to deliver superlative guidance. As I see it, weakness in its Gaming and Embedded segments continues to mask the stellar performance within AMD’s Data Center and Client segments. Based on AMD’s steep Mi300x ramp and future roadmap [Mi325x (Q4 2024), Mi350x (H2 2025), and Mi400x (2026)], I continue to believe in the AI-powered hypergrowth story for AMD – reflected in my valuation model growth assumptions.

On the back of a -10% post-ER dip, AMD stock looks fairly valued; however, its expected 5-year CAGR of 12.3% is not enough to warrant fresh capital allocation at this time. As disclosed previously, I am a modest buyer in the $130s, and an aggressive one in the low $100s.

Key Takeaway: I rate AMD a “Hold” in the $150s.

Source: AMD: Su Fumbles, Stock Tumbles, But There’s A Silver Lining.

Since then, AMD has shed another -15% of its market capitalization, with the stock dropping from the ~$140s to the $120s. Now, as an AMD shareholder, I am not too pleased with its recent stock performance; however, as a long-term oriented capital allocator, I am happy that AMD – a business that we adore – is investible yet again, with its 5-year expected CAGR return of ~16% now exceeding TQI’s investment hurdle rate of 15%.

Updated Fair Value And Expected Return

Note: For today’s valuation exercise, all model assumptions from our previous assessment have been held constant. This means the jump in AMD’s 5-year expected CAGR return from 12.3% to 16.1% is a direct result of AMD stock price declining from ~$150 per share to ~$128 per share.

The Business Is In Fine Fettle

Since we discussed AMD’s business trends at length in our previous update, I will not be repeating that analysis in this article; however, as a gentle reminder, AMD is currently generating record quarterly revenues and free cash flows – driven by AI-powered hypergrowth in its Data Center business.

As of Q3 2024, AMD’s revenue growth rate had re-accelerated back up to ~18% y/y, and management’s guidance for Q4 2024 calls for this positive trend to continue in the ongoing quarter, with AMD’s revenue growth set to rise to ~22% in Q4.

Furthermore, AMD’s business momentum is likely to remain robust in 2025, with AMD’s Mi325x Instinct Accelerators coming to market imminently – to be followed by Mi350x in the back half of next year.

AMD continues to deliver on our roadmap, offering customers the performance they need and the choice they want, to bring AI infrastructure, at scale, to market faster. With the new AMD Instinct accelerators, EPYC processors and AMD Pensando networking engines, the continued growth of our open software ecosystem, and the ability to tie this all together into optimized AI infrastructure, AMD underscores the critical expertise to build and deploy world class AI solutions.

AMD Instinct MI325X accelerators deliver industry-leading memory capacity and bandwidth, with 256GB of HBM3E supporting 6.0TB/s offering 1.8X more capacity and 1.3x more bandwidth than the H200¹. The AMD Instinct MI325X also offers 1.3X greater peak theoretical FP16 and FP8 compute performance compared to H200¹.

This leadership memory and compute can provide up to 1.3X the inference performance on Mistral 7B at FP16², 1.2X the inference performance on Llama 3.1 70B at FP8³ and 1.4X the inference performance on Mixtral 8x7B at FP16 of the H200⁴.

AMD Instinct MI325X accelerators are currently on track for production shipments in Q4 2024 and are expected to have widespread system availability from a broad set of platform providers, including Dell Technologies, Eviden, Gigabyte, Hewlett Packard Enterprise, Lenovo, Supermicro and others starting in Q1 2025.

Continuing its commitment to an annual roadmap cadence, AMD previewed the next-generation AMD Instinct MI350 series accelerators. Based on AMD CDNA 4 architecture, AMD Instinct MI350 series accelerators are designed to deliver a 35x improvement in inference performance compared to AMD CDNA 3-based accelerators⁵.

The AMD Instinct MI350 series will continue to drive memory capacity leadership with up to 288GB of HBM3E memory per accelerator. The AMD Instinct MI350 series accelerators are on track to be available during the second half of 2025.

– Forrest Norrod, executive vice president and general manager, Data Center Solutions Business Group, AMD – Source (emphasis added).

While the return on investment [ROI] on the ongoing AI Infrastructure boom remains an unanswered mystery thus far, the AI chip opportunity is undoubtedly massive – estimated to be a $400B TAM by 2027. From an AI GPU market share perspective, AMD is almost an invisible second to Nvidia right now; however, it appears to be the only genuine contender currently despite reportedly not seeing “heavy demand” for its AI chips at AWS:

Now, in light of these comments, some Wall Street analysts have recently downgraded AMD stock; however, on its part, AMD has labeled this report as “not accurate” – talking up its relationship with AWS:

We have a great relationship with AWS and the report was not accurate – we are actively engaged with AWS and end customers on AI opportunities

Source: AMD says report of AWS ‘not yet’ seeing heavy demand is ‘not accurate’.

Getting AWS onboard is likely near the top of Lisa Su’s 2025 wishlist, and I would be ecstatic if and when that happens. That said, with the likes of Microsoft (MSFT) and Meta Platforms (META) expanding their adoption of AMD’s Instinct accelerators recently, I continue to believe in the idea that AMD can command at least a 5-10% share of the AI GPU market over the long run. And considering the projected TAM of $400B+, I think AMD has a tremendous growth runway ahead of itself!

AMD’s Technical Setup Warrants Accumulation

Before we look at AMD’s technical chart, let’s revise our previous work:

Back in early August, I upgraded AMD to a “Buy” rating in the low-$130s:

From a fundamental perspective, AMD is reporting green shoots in its Data Center business, driven by demand for its AI GPUs. The robust CAPEX guidance from cloud hyperscalers serves as a positive read-through for AI chipmakers. While AMD is a distant second right now (given Nvidia’s dominance in the AI GPU market), I think AMD can carve out a sizeable market share in this rapidly growing market as enterprise customers will require an alternative provider to limit Nvidia’s dominance. We have finally received data-based evidence that supports AMD’s ability to deliver AI-powered hypergrowth. The product roadmap looks enticing, and Lisa Su’s confidence about going head-to-head with Nvidia is inspiring.

In recent sessions, AMD’s stock has moderated to the low $130s. From a technical perspective, AMD looks primed for another push down to test the long-term support trendline in the low-$100s. In the event of a hard landing, broader equity markets and AMD stock could drop even lower.

However, considering improving business trends, robust demand outlook, and the seismic shift in long-term risk/reward, I am upgrading AMD stock from “Hold/Neutral” to a “Buy” rating in the low $130s. Given the technical setup, I like the idea of slow, staggered accumulation. If AMD stock were to slide down to the low-$100s, I would turn into an aggressive buyer.

Source: AMD: I Was Wrong, It’s Time To Buy.

Since then, AMD stock has failed a retest of the lower trendline of its upward channel (marked in green dotted lines), and is now trading in a triangle formation. As we know, triangles can break in either direction. Hence, from a technical perspective, AMD looks finely poised.

Source: AMD: Su Fumbles, Stock Tumbles, But There’s A Silver Lining.

Now, over the last month or so, AMD stock has decisively broken the triangle pattern to the downside – losing key moving averages [10-week, 20-week, 40-week, and 100-week] in the process.

From a technical perspective, AMD’s momentum looks weak. And with the Weekly RSI still not indicative of “oversold” conditions, AMD stock may continue to slide towards the long-term support trend line marked in the blue arrow on the chart above, i.e., the low-$100s, in the near future.

Now, in the event of an economic recession, I can envision a semiconductor industry downcycle and a much deeper pullback in AMD stock [potentially down to the mid-double-digits]. However, current economic data indicates a Goldilocks environment, and it is difficult to foresee an imminent recession. Therefore, I view the low-$100s to $130s as a solid buy zone.

Concluding Thoughts

From a business and valuation standpoint, AMD is an enticing prospect in the $120s, and as such, at TQI, we are adding to our long position once again. Technically, AMD stock looks destined to re-test the long-term support trend line in the low-$100s. However, I am a buyer right here, right now; and if AMD gets down to the low-$100s, I will turn into an aggressive buyer!

Key Takeaway: I rate AMD a “Buy” in the $120s.

Thank you for reading, and happy investing! Please share any questions, thoughts, and/or concerns in the comments section below or DM me.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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