Is AMD Stock Still a Buy in February?

With shares up 123% over the last 12 months, Advanced Micro Devices (AMD 4.21%) has been a big beneficiary of the artificial intelligence (AI) trend. But unlike rival Nvidia, which has seen revenue and profits surge, AMD’s rally relies on future expectations more than current results. Let’s discuss the company’s recently reported fourth-quarter earnings and explore how its chip business could evolve over the coming years.

Fourth-quarter earnings were less than stellar

AMD’s fourth-quarter earnings report was a mixed bag. Total revenue grew by 10% year over year to $6.17 billion on strength in its data center segment, which rose 38%. The company recently released the latest versions of its AMD Instinct graphics processing units (GPUs) designed for training and running AI applications. And these products likely contributed to the healthy expansion in the period.

With that said, AMD sells more than just data center chips. Other segments like gaming and embedded hardware fell 17% and 24%, respectively, leading to an overall lackluster showing. The company’s future guidance also left much to be desired.

Management projects first-quarter sales of $5.4 billion, a steep discount to the $5.73 billion analysts expected. But most alarmingly, the company expects data center revenue to be flat as declines in central processing unit (CPU) sales offset growth in the new AI GPUs. For the full year of 2024, CEO Lisa Su expects data center GPUs to add $3.5 billion to AMD’s top line. But this won’t mean much if the company’s other segments continue to decline by a similar or greater amount.

AMD’s thesis depends on the next three years

Right now, AMD’s bull thesis rests on Lisa Su’s projection that the AI chip market could rise to $400 billion by 2027. If AMD can capture just 5% of that opportunity, it could add a whopping $20 billion to its revenue in just three years — probably enough to overcome any possible weakness in its other businesses. The company has already secured large cloud customers like Microsoft, Oracle, and Meta, which will use its Instinct GPUs to help power both internal and external workloads.

Image source: Getty Images.

To grow market share, AMD must make its chips competitive with Nvidia‘s flagship H100. And it can do this by focusing on performance and price.

The Financial Times estimates that each Nvidia H100 costs $40,000. And Nvidia’s gross margin rose from 54% to 74% in the third quarter, which suggests it is taking advantage of the lack of alternatives to hike prices. The market looks ripe for more lower-cost options.

But talk (and estimates) are cheap. Over the coming years, AMD will have to take advantage of this opportunity to grow its AI chip business. And so far it has not shown concrete results that justify its stock’s rally.

Priced for perfection

The AI industry is expected to expand massively over the next three years, and AMD is in a prime position to capitalize on this growth. But that doesn’t mean the stock lives up to its lofty price tag.

With a forward price-to-earnings (P/E) of 44, AMD has a higher valuation than Nvidia, which trades for a forward P/E of 30. This means it has very little room for error, and the next three years will be a make-or-break period for the company. Shares remain a buy, but more cautious investors may want to wait for more quarters of data before taking a position.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.

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