AMD: Waiting On AI Inflection Point

Summary:

• Advanced Micro Devices, Inc.’s quarterly results disappointed investors, with weakness in Gaming and Embedded segments offsetting strong gains in Data Center sales.
• The company increased its AI GPU target for the year to $4 billion, but investors were hoping for a larger increase.
• AMD is facing supply constraints but expects to ramp up supply throughout the year, potentially leading to a sales inflection in the 2H.
• The stock trades at only 27x forward EPS estimates without a major inflection point factored into consensus estimates.

Advanced Micro Devices, Inc. (NASDAQ:AMD) slumped following quarterly results that generally disappointed investors. The chip company didn’t guide up enough on AI GPU demand to meet investor hype, though AMD hasn’t ruled out a major inflection point in sales. My investment thesis remains Bullish on the stock, with the market possibly misunderstanding the AI demand scenario.

Mixed Quarter

AMD definitely wasn’t firing on all cylinders during the March quarter. The chip company saw surging Data Center demand offset with weakness in Gaming and Embedded segments, leading to the following quarterly results:

As the results show, AMD only grew Q1 ’24 revenues 2.2% YoY, while Data Center sales jumped 80% to record levels. The chip company has been stuck at quarterly revenues just below the $6 billion range, while Data Center revenues have jumped in the last couple of quarters with the initial AI GPU ramp from the MI300 chip.

Unfortunately, weakness in the Gaming and Embedded segments offset most of the GPU gains. Sales in both segments were down nearly 50% from last year, dipping from $3.3 billion last Q1 to only $1.8 billion in the March quarter. The below chart noticeably highlights the volatility within the different segments over the last year or so.

A big key is where the trends head the rest of the year. Gaming is expected to remain weak while AMD forecasts Embedded to start rebounding in the 2H while Client should have a decent year with AI PCs ramping.

As long as the other divisions are generally additive, the AI GPU segment will provide a major sales boost. The stock slump was led by investors expecting more from the AI business, and AMD didn’t really disappoint on this aspect, though the company didn’t provide the $5 to $8 billion guidance for the year desired by investors.

What AMD did is increase the AI GPU target for the year from $3.5 billion to $4.0 billion. The market wanted a bigger hike, with Nvidia sales jumping through the roof on a quarterly basis.

What CEO Lisa Su did is provide an important distinction on the supply capacity and demand environment. AMD had previously hinted at supply far above the 2024 AI GPU guidance target of $3.5 billion provided with the Q4’23 earnings.

On the Q1 ’24 earnings call, the CEO was more clear that AMD faces a current supply constraint, which turns into extra supply beyond the $4.0 billion sales target as the 2H unfolds (emphasis added):

I think Q2 will be another significant ramp. And we’re going to ramp supply every quarter this year. So I think the supply chain is going well. We are tight on supply. So there’s no question in the near term that if we had more supply, we have demand for that product…

So we’ve said before that our goal is to ensure that we have supply that exceeds the current guidance, and that is true. So as we’ve upped our guidance from $3.5 billion to $4 billion, we still — we have supply visibility significantly beyond that.

AMD provided total AI GPU MI300 data center sales of $1 billion so far, amounting to general estimates for Q1 sales of just $600 million. The company guided Q2 revenues to $5.7 billion, suggesting AI sales hit in the $800+ million range, leading to 1H sales in the $1.4 to $1.5 billion range.

The current guidance has AI GPU revenues reaching $4.0 billion for 2024, or at least $2.5 billion in the 2H. AMD would average $1.25 billion per quarter in the 2H of 2024.

While this is a huge boost from the $400 million start last Q4, Nvidia is on pace for current quarter revenues of $24 billion with up to $18 billion in AI GPU sales. Nvidia has added at least $2 billion in sequential AI chip sales for quarters now, while AMD is bumping up actual sales by $200 million each sequential.

The biggest question is whether AMD actually participates in the same type of growth. The company needs quarterly AI GPU sales to soar towards $2 billion to just grab 10% market share from Nvidia.

Previous numbers had suggested AMD obtaining up to 600K GPUs from Taiwan Semiconductor Manufacturing Company Limited (TSM) to support much higher sales, possibly up to $9 billion at $15,000 each. Ultimately, though, the inflection point still hasn’t occurred, and the market has huge doubts now.

Back on the earnings call, analyst Vivek Arya from Bank of America Securities asked about AMD exiting the year with a $6 billion AI GPU run rate, and the CEO didn’t really answer the question. The response did confirm that customer progression continues to expand with a focus on increasing workloads, and the company would probably need to hit $1.5 billion in Q4 sales to just meet the updated $4.0 billion target.

Not Priced For Inflection Point

AMD has fallen back to $155 from a high of $227 in early March. Analysts currently have 2025 EPS targets at $5.57 with sales jumping 28% to $32.7 billion.

NVIDIA Corporation (NVDA) is forecast to end FY25 with FQ4 (January) quarterly sales of $31.0 billion alone. In essence, AMD might be forecast for sales to grow some $6 billion next year, but growth in other sectors could limit the AI GPU sales growth to only $4 to $5 billion in comparison to Nvidia adding some $25 billion in additional quarterly sales during the period. Remember, Nvidia had back-to-back quarters in the $6 billion range to end FY23 before the AI demand took off.

The consensus estimates only forecast AMD collecting some 10% of the AI GPU market from Nvidia. The big debate is whether AMD can generate a major inflection point where sales jump $1-2 billion sequentially and the numbers far exceed the current consensus targets of $32 billion, leading to the $5+ EPS as highlighted below.

Our previous research had set a basic 2025 revenue target of $35 billion, leading to an EPS of $6.54 on higher gross margins. The above numbers are updated for the lower share count.

If AMD actually reaches an AI chip inflection point like Nvidia, sales could jump to $45+ billion next year. The above chart highlights EPS estimates of far higher revenues, with gross margins reaching 60% next year and operating expenses falling to a previous target of only 23%.

Either way, AMD is set up for a big EPS even without a major inflection point for AI GPU sales.

The stock only trades at ~27x forward EPS targets. These numbers don’t factor in any major inflection points in AI chip sales, providing a catalyst for AMD.

Takeaway

The key investor takeaway is that investors should use any weakness to continue loading up on AMD. The current volatility in other segments is masking the growth in AI GPU data center sales, and the chip company is still waiting for a major inflection point with supply to hit a much higher sales level in the future.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

---

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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.

---

If you’d like to learn more about how to best position yourself in under valued stocks mispriced by the market to start May, consider joining Out Fox The Street. 

The service offers a model portfolio, daily updates, trade alerts and real-time chat. Sign up now for a risk-free 2-week trial to started finding the best stocks with potential to double and triple in the next few years.