Advanced Micro Devices designs some of the most important semiconductor chips in the world, used in fast-growing markets like data storage, personal computing and gaming. In particular, AMD’s relatively new artificial intelligence chip, the MI300X, is carving out a niche in that fast-growing market at the same time a new personal computer refresh cycle is getting underway.  Add management that’s executing flawlessly under the leadership of CEO Lisa Su, and you have a tech name deserving of consideration in any portfolio.

Presence In Key Markets

AMD designs both central processing units (CPUs) and graphics processing units (GPUs), which are used in just about every smart device on the planet: mobile phones, gaming consoles, personal computers, massive data centers. It competes with the likes of Intel and Nvidia. Several years ago, AMD laid out a product roadmap that made clear the direction and timing of several key launches, a must for big-spending corporate customers looking to commit to a supplier for the long term. Since then, management has done an incredible job executing on that roadmap and hitting their stated targets, despite the pandemic. In fact, the execution has been so strong that in recent quarters, earnings beats were met with upward revisions to guidance. Meanwhile, Intel made a slew of strategic missteps over the past several years, helping AMD grab greater market share gains in the CPU market. AMD’s strong performance has also put in an increasingly competitive footing with the reigning semi king, Nvidia, on the GPU front; AMD offers more budget friendly consumer GPU alternatives that give Nvidia a run for its money in terms of performance.

AMD makes chips for three key end markets including the data center (where the cloud lives), personal computers (PCs) and gaming. Combined, management estimates the value of the market at roughly $79 billion ($35 billion data center, $43 billion PCs, and $12 billion gaming). Adoption of AMD chips in each market accelerated because of the COVID-19 pandemic. On the cloud front, management teams across every industry now acknowledge more than ever the need to support decentralized, remote work environments. For PCs, remote working and learning means that one computer per household is no longer adequate; it’s often one PC or smart device per person. And for the gaming business, this extended period of staying indoors has been a boon, solidifying what is the fastest-growing segment in entertainment media.

2024 Investment Thesis

There’s two main reasons why we are returning to AMD: It has a very good AI product in the MI300X (the company's new AI accelerator chip), and there’s a new PC refresh cycle getting underway.

When AMD reported its first-quarter results in April, the stock fell roughly 9% the next day on numbers that could not meet Wall Street’s lofty expectations. The key focus was how much would CEO Lisa Su raise the sales outlook for the MI300X. Unfortunately for AMD at that time, expectations were completely out of whack. Although Su did raise the guide to exceeding $4 billion in 2024, up from $3.5 billion guided in January, the problem was that more bullish investors — also known as buyside expectations — wanted a number closer to $7 billion.

We don’t think AMD missed the bar because of demand. The company has said the MI300X is the fastest-ramping product in AMD history thanks to key partnerships with Oracle and Microsoft and Meta Platforms to power generative AI training and inferencing, but the market wanted more. The issue was constrained supply. If AMD’s supply improves through the second half of this year, as we expect based on the recent numbers from Micron and Taiwan Semiconductor Manufacturing Company, we think Su and AMD will be able to surprise the Street with upside to sales.

We always talk about the technology leadership that Nvidia has because its AI products are a platform, offering a combination of best-in-class hardware and software. For AMD to really compete in AI, what it needs to do is add more AI software tools to its ecosystem. That’s why the market cheered last week when it announced plans to acquire Silo AI for $665 million in cash. We were unfamiliar with Silo AI before the news, but it is the largest private AI lab in Europe with a team of world-class AI scientists and engineers that are expected to work with AMD’s hardware unit to develop software solutions for customers. In a note published Thursday, Melius Research analyst Ben Reitzes said the acquisition “won’t put AMD on par with Nvidia, but it does help in terms of being able to support its ecosystem and driving some incremental business.” AMD’s Data Center segment — which includes sales of AI chips — is expected to generate revenues of about $12.5 billion in 2024 and jump to $18.2 billion in 2025, which would represent about 56% of total sales, according to estimated compiled by FactSet.

Another business of AMD’s that we are focused on is its PC processor business, also known as the Client segment. Here, AMD is in the early innings of benefitting from the return to growth in the PC industry, supported by recent data points from IDC and Gartner. We believe this new PC cycle has legs well through 2025 as people replace the aging computers purchased during the Covid-19 pandemic and upgrade to new AI-infused PCs. After falling sharply in 2023, AMD’s Client segment is expected to return to growth this year, generate revenues of about $6.1 billion in 2024, according to the current FactSet consensus forecast. Further growth is expected in 2025, with analysts expecting $6.8 billion in Client revenue, which would represent about 21% of total sales, according to FactSet.

Price Target

We have a 2025 price target of $217, based on applying a 40x forward multiple on consensus 2025 earnings per share forecasts of $5.42 (FactSet). We believe this multiple is reasonable, given a 58.5% estimated 2024-2025 earnings growth, which makes our price target reflects a 0.7x forward price-to-earnings-to-growth (PEG) ratio. In contrast, peers such as NVIDIA or Broadcom, trade at 0.9x PEG ratio. Additionally, 40x forward PE is deserved given the company is only at the early innings of its data center revenue growth. In the past 5 years, AMD has traded between 14x and 60x forward PE.