AMD: Su Fumbles, Stock Tumbles, But There’s A Silver Lining (Rating Downgrade)

Summary:

• Advanced Micro Devices, Inc. stock is nosediving in light of reporting its Q3 2024 results despite beating consensus estimates.
• AMD’s guidance for Q4 falling short of analyst estimates is the perceived culprit.
• However, there’s a silver lining to this double-digit dip in AMD stock. Read on to learn more.

Introduction

Despite topping expectations in its Q3 2024 report, Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is tumbling by a double-digit percentage, with CEO Lisa Su & Co.’s forward guidance falling short of consensus.

Now, heading into the report, AMD stock had run up from the low-$130s to the high-$160s in a matter of weeks. Hence, Mr. Market’s adverse reaction could be an unwinding of bullish bets from short-term-oriented traders.

In today’s note, we will dive into AMD’s Q3 2024 report and re-evaluate AMD’s long-term risk/reward and technical chart to formulate an informed investment decision in light of the new information received from AMD’s Q3 report and earnings conference call. Let’s jump right in!

Brief Review Of AMD’s Q3 2024 Report

For Q2 2024, AMD delivered revenues of $6.82B [+17.6% y/y, +16.8% q/q], beating street estimates of $6.71B by $104.3M – driven by robust growth in its Data Center [$3.5B, +122% y/y] and Client [$1.9B, +29% y/y] segments – powered by Instinct Mi300x AI GPUs+EPYC CPUs and Ryzen PC Processors, respectively.

Amid insatiable demand for compute, AMD’s Instinct accelerators are ramping up rapidly – as evidenced by AMD’s triple-digit Data Center revenue growth. Furthermore, AMD’s leadership lifted their AI GPU revenue projection for 2024 to $5B+ from the previous expectation of $4.5B+, and reiterated their belief in taking on Nvidia (NVDA) in the AI GPU market.

Unfortunately, this updated projection isn’t superlative, especially when we consider Nvidia’s 2025 revenue estimates of $150-200B+ for data center AI GPUs [Blackwell]. Now, the next generation of AI GPUs for AMD, i.e., Mi325x, is set to be available starting this quarter, but it will likely contribute to AMD’s top line meaningfully only in 2025. And we already know that particular chip is not competitive with Nvidia’s Blackwell:

Now, Mi325x is based on CDNA3 architecture (same as Mi300x), and so the performance (1.3x) and memory (2x) improvements are somewhat incremental. However, with CDNA4-based Mi350x, AMD is targeting a 35x improvement in inference performance over CDNA-3, and Su believes Mi350x will compete directly with Nvidia’s Blackwell chips.

Source: AMD: I Was Wrong, It’s Time To Buy (Rating Upgrade).

While ROI on AI CAPEX remains an unanswered mystery thus far, the AI chip opportunity is undoubtedly massive – estimated to be a $400B TAM by 2027. In my view, the cloud hyperscalers and other market participants would be more than happy about the emergence of a genuine alternative to Nvidia.

And Su’s comments around customer willingness to give AMD a chance supports this viewpoint:

Harsh Kumar:

Lisa, first of all, congratulations on your 10-year anniversary. I just looked at the 10-year chart, the stock is around $3, so a heck of a job here. And also, congratulations on $5 billion in Instinct revenues.

So, I wanted to ask the first question. This is one we get from investors all the time. In the coming year, let’s say, 2025, your key competitor will take most of the TAM of the AI market, the GPU market, rough count, they’ll take in something like $50 billion, $60 billion, you’ll get another $5 billion to $10 billion, call it.

So, the question is, what do you think is the major hindrance? You’ve got chip level compatibility. So does it boil down to the fact that you’re just earlier in the game. You’ve been doing this just 12 months in a serious manner? Or is there still a rack level of disparity? If you could just help us, think about what the hindrances are to you becoming a major player here.

Dr. Lisa Su:

Yes. Sure, Harsh. Thanks for the question and for the comments. Maybe let me say, I view them as opportunities. If you remember, Harsh, and I think you do, our EPYC ramp from Zen 1, Zen 2, Zen 3, Zen 4 we had extremely good product even back in the Rome days, but it does take time to ensure that there is trust built, there is familiarity with the product that there are some differences, although we’re both GPUs. There are some differences, obviously, in the software environment. And people want to get comfortable with the workload ramp.

So, from a ramp standpoint, I’m actually very positive on the ramp rate. It’s the fastest product ramp that I’ve seen overall. And my view is this is a multi-generational journey. We’ve always said that. We feel very good about the progress I think next year is going to be about expanding both customer set as well as workload. And as we get into the MI400 series, we think it’s an exceptional product. So — all in all, the ramp is going well, and we will continue to earn and — earn the trust and the partnership of these large customers.

What I will say is customers are very, very open to AMD. And we see that everywhere we go, everyone is giving us a very fair shot at earning their business, and that’s what we intend to do.

Source: AMD Q3 2024 Earnings Call Transcript (emphasis added).

With the likes of Microsoft (MSFT) and Meta Platforms (META) expanding their adoption of AMD’s Instinct acceleration, I continue to believe in the idea that AMD can command at least 5-10% share of the AI GPU market over the long run.

Now, in addition to strength in the Data Center, AMD’s Client business continued its recovery in Q3. With AI PCs reigniting industry growth, AMD is delivering rapid growth within its Client segment [+29% y/y] with Ryzen AI processors, continually taking market share from Intel (INTC).

Unfortunately, AMD’s Gaming [$462M, -69% y/y] and Embedded [$927M, -25% y/y] segments remained significant drags on the semiconductor giant in Q3 2024. Gaming revenues were expected to weaken in H2 2024 due to weak console sales, and that’s what played out in Q3. While embedded revenues returned to positive sequential growth amid continued inventory adjustments from AMD’s customers, the recovery is proving to be slower than expected.

For Q4 2024, AMD’s management has guided for revenues of $7.5B (+/- $0.3B), which implies further acceleration in the business to ~22% y/y top-line growth. However, with Wall Street estimates for Q4 revenue sitting at $7.54B heading into the Q3 report, AMD’s guidance is a miss.

While the quantum of AMD’s guidance miss is minimal, investor expectations were quite high going into the Q3 report, and through that lens, the post-ER dip may be justified. However, is this dip a buying opportunity?

AMD Fair Value And Expected Return

In my view, AMD guiding slightly lower than consensus estimates for Q4 is just noise for long-term investors. And considering its management’s history, AMD will likely beat its guidance anyway. Hence, I am sticking with my model assumptions for AMD in our valuation exercise.

Considering the strong ramp for Mi300x, AMD’s updated product roadmap, and investments in its AI ecosystem (hardware + software), I am lifting my model’s revenue base for 2024 to $26B [up from $25.5B] and underwriting a 5-year CAGR sales growth assumption of 25% [up from 20%]. The risk of “overbuilding” AI capacity is very real [i.e., AMD can and will likely experience non-linear, volatile growth]; however, with $1T worth of cloud & data center infrastructure set to be replaced over the next 10 years, AMD has a long, long runway for growth. The raised growth assumption also expresses my optimism about AMD’s Client business with upcoming AI PCs and Intel’s apparent blow-up likely to allow AMD to steal even more market share in PCs.

All other assumptions are relatively straightforward, but please let me know if you have any questions.

Here’s my updated valuation model for AMD:

In light of AMD’s post-Q3 sell-off, the stock has aligned with TQI’s fair value estimate of ~$152 per share, and that’s the silver lining!

Predicting where a stock will trade in the short term is impossible; however, over the long run, a stock will track its business fundamentals and obey the immutable laws of money. If the interest rates were to return to artificially low levels (i.e., ZIRP), higher equity multiples would be justifiable. However, I work with the assumption that interest rates will eventually track the long-term average of ~5%. Inverting this number, we get a trading multiple of ~20x (P/FCF).

Assuming a base case P/FCF exit multiple of ~20x, we reach a 5-year price target of ~$268 per share for AMD, which implies a CAGR return of ~12.3%.

While AMD’s base case expected CAGR exceeds long-term market (SPY) returns (of 8%-10% per year), it falls short of our investment hurdle rate (of 15%). Hence, AMD is a “Hold” under our valuation methodology right now.

Concluding Thoughts: Is AMD A Buy, Sell, Or Hold After Q2 2024 Earnings?

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 (Rating Upgrade).

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.

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.

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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