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If it weren't for some remarkable CEO turnover (turnaround?) at OpenAI, the parent company of ChatGPT, the latest quarterly earnings report from chip design company Nvidia (NVDA) would have been hands-down the biggest artificial intelligence (AI) story of the holiday week on Wall Street. Instead, as investors watched Sam Altman's resume updating in real time with roughly the same speed as Microsoft's (MSFT) share price, NVDA and its Q3 earnings had to settle for a tie.
Semiconductors are the beating heart of any AI project or application, but specialized chips are required to quickly and capably process the heavy computing demands. So, while the VanEck Semiconductor ETF (SMH) has managed a standout year-to-date gain of 60%, the returns among individual components have been somewhat lopsided. While Nvidia shares have more than tripled on a YTD basis, for example, Texas Instruments (TXN) is down 3.8%.
One AI chip stock that's comfortably outpacing most of its semiconductor peers this year is Advanced Micro Devices (AMD). AMD designs and manufactures computer processors, graphics cards, and other related technologies. The company's products are used in various devices, including PCs, servers, gaming consoles, and embedded systems. It
AMD currently commands a market cap of $190.65 billion, and the shares have gained about 90% YTD. Meanwhile, the Street-high target price of $200 implies expectations for the stock to keep surging over the next 12 months. But can AMD climb another 63% from here? Let's take a look.
AMD Tops Earnings Estimates
AMD's latest results for the third quarter topped expectations, even as revenue and earnings growth were modest. Revenues of $5.8 billion rose by 4% from the previous year, and surpassed analysts' expectations by $40 million. Weakness in the gaming and embedded segments were offset by a 42% jump in client segment revenue. Over the past 10 years, AMD has clocked a revenue CAGR of 16.35%.
The company also reported 4% yearly EPS growth to $0.70, above the consensus estimate of $0.68. In fact, barring one instance, AMD's EPS have topped expectations in each of the past five quarters.
Notably, the company recorded a decline in net cash from operating activities in the quarter. However, the company's robust cash and equivalents balance of about $5.8 billion gives it ample liquidity. Moreover, AMD's long-term debt levels also eased to $1.7 billion compared to about $2.5 billion at the start of the year.
Well-Positioned to Benefit from the AI Boom
The market for AI globally is set to reach $738 billion by 2030, according to this Statista study - and AMD remains in an advantageous position to benefit from it.
Along with incorporating AI capabilities into its gaming chips, AMD's enterprise solutions also provide another compelling growth driver in the AI space. Specifically, AMD revealed its MI300X chip in June to burnish its AI credentials further and to compete effectively with its fellow chip company, Nvidia.
Geared towards large language and AI models, the MI300X boasts an exceptional 192 GB memory capacity, surpassing Nvidia's competitor, the H100, which is limited to 120 GB. Despite delivering superior performance, AMD's MI300X carries a significantly more affordable price tag, potentially enabling AMD to challenge Nvidia's market dominance.
In a bid to accelerate AI adoption among enterprises, AMD has been making significant investments in its ROCm software stack, establishing it as a viable competitor to Nvidia's CUDA software. Moreover, to address the dominance of CUDA-based code on GitHub and foster a more robust ecosystem, AMD has developed a PyTorch/TensorFlow Code Environment for AMD GPUs. This environment facilitates seamless compatibility with existing CUDA-based code repositories, empowering developers to build machine learning applications more efficiently on AMD GPUs.
Strength in CPU Market Share Amid Gaming Headwinds
Although AMD is increasingly focusing on the AI market - CEO Lisa Su reiterated the company's focus here by saying that AI remains the company's “largest and most strategic long-term growth opportunity” - it has not put the CPU market on the back burner.
In fact, AMD has doubled its market share in CPU from 17.5% in 2016 to 35% currently. Competing with Intel in this space, AMD's AI enhancements are expected to further increase its CPU market share.
Meanwhile, gaming revenues took a hit due to the length of the console cycle, and guidance for the segment looking into early 2024 was also soft. However, as AMD shifts its revenue mix toward the more resilient and less seasonally volatile data center segment, it should help to offset this expected weakness.
What Do Analysts Expect for AMD?
On average, analysts have a “Strong Buy” rating for AMD. The Street-high target price of $200 denotes an impressive upside potential of more than 63% from current levels. The Rosenblatt analyst who maintains the $200 target, notably, is optimistic about AMD's data center outlook.
Meanwhile, the mean target price of $131.90 represents an upside potential of just 7.7% from current levels. Out of 29 analysts covering the stock, 22 have a “Strong Buy” rating (up from 21 a month ago), one has a “Moderate Buy” rating, and six have a “Hold” rating.
