AMD stock is tanking after its Q3 2024 earnings report. Investors aren’t impressed by the weakness in non-AI segments as well as a lower-than-expected guidance. We believe the stock is worth taking a deeper look at, especially with AI infrastructure investments continuing to dominate Big Tech spending.
Advanced Micro Devices, Inc. (AMD), an American fabless semiconductor company, conceptualizes, develops, and sells computer processors and related technologies for diverse markets, from consumer to business.
Founded in 1968 as a Silicon Valley start-up, the company gained a dominant market position due to its cutting-edge computing and graphics technologies, coupled with the transition to a fabless structural model that initiates outsourcing manufacturing to an external party such as GlobalFoundries.
AMD deals in a variety of products, namely microprocessors, graphics processors, motherboard chipsets, Graphic Processing Units (GPUs), Accelerated Processing Units (APUs), and Field-Programmable Gate Arrays (FPGAs). In a recent development, AMD disclosed its “Zen 5” Ryzen processors for an Advanced AI experience.
Although CPUs and GPUs are the major revenue drivers, over the years, the enterprise range has witnessed growing demand stemming from data centers and cloud computing growth. AMD reported an impressive $5.8 billion in revenue for the second quarter of 2024, with a gross margin of 49%. The third quarter also beat analyst estimates, with the revenue coming in at $6.8 billion, powered by AI revenue.
The primary clients of AMD include key technology companies, PC manufacturers like Dell and HP, and gaming console makers, particularly Sony (PlayStation) and Microsoft (Xbox).
AMD serves a range of end markets, including personal computing, data centers, embedded systems, gaming, and robustly performing computing applications. It is the data center market that we will focus on. AMD reported a staggering 122% growth in the Data Center segment. The growth has come both from sales of EPYC CPUs and AMD Instinct GPUs.
AMD is expected to continue to face inconsistent and cyclical AI spending from its primary clients. However, over a longer duration of time, this should not bother investors. Estimates put the total AI spending for the rest of the decade at over $500 billion. While AMD is no Nvidia, it is still a dominant market player and stands to benefit from this spending.
For the above reason, the weakness in the gaming segment (69% YoY decline) and the Embedded segment (25% YoY decline) shouldn’t worry investors. The company needs to divert its energy to the segment that is growing the fastest. AI is a fast developing technology and AMD wants to strike while the iron is hot.
This might sound like a short-term focus for AMD, but controlling the market in the short term is what will put AMD at the center of other businesses’s AI infrastructure. Once that happens, future revenue will eventually trickle down to the bottom line. For us, the ‘poor’ earnings report is a buying opportunity!
AMD ranks 18th on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 108 hedge fund portfolios held AMD at the end of the second quarter which was 124 in the previous quarter. While we acknowledge the potential of AMD as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as AMD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
