Advanced Micro Devices is at a turning point and ready to rebound

Key Points

• Advanced Micro Devices shares fall on weak guidance, but an inflection point is at hand. 
• Q4 guidance is weak, but ramping AI chip production is expected to drive $2 billion in new sales next year. 
• Analysts view the results as a treat, giving greater visibility into AMD's future. 

Advanced Micro Devices NASDAQ: AMD share price pulled back following the Q3 release, setting the market up for a solid rebound. The price action in this market is oversold after retracing from its 2023 peak and showing signs of support at critical price levels. Because support coincides with an expected inflection with business, AMD shares could rally into year-end and 2024. Based on the analyst chatter, consensus sentiment, and price target, this stock could gain a solid 30% in the near-to-mid-term and advance from there over the long. 

Advanced Micro Devices shifts into AI mode

Advanced Micro Devices had a solid quarter, with legacy product weakness offset by strength in new AI-oriented offerings. The revenue of $5.8 billion rose 4.1% compared to last year and beat consensus by nearly 200 basis points on strength in Data Center and Client Computing. Data Center, as a whole, grew 0% compared to last year, with sales of 4th gen AMD EPYC driving a 21% sequential gain. Client Computing grew by 41%, driven by sales of new Ryzen 7000 chips and demand from the PC and server industry. 

Embedded and Gaming were the areas of weakness. Both contracted by high-single-digits compared to last year, with sequential weakness suggesting slowing in Q4. This is seen in the guidance for Q4 but offset by the outlook for Data Center sales. Data Center sales are on a growth trajectory driven 4th gen EPYC and the ramp of MI300 production. The MI300 line is ramping to scale production in Q4 and is expected to drive $2 billion in new sales next year. CEO Dr. Lisa Su says it will be the fastest ramp to $1 billion for any AMD product. 

Margin news is also good if weak, compared to analysts' consensus expectations. The company reported a 1% increase in adjusted gross margin and a 1% decline in operating margin to drive a 4% gain on the bottom line. The good news is that $0.70 in adjusted earnings is still $0.02 better than the consensus due to the top-line strength, and some margin improvement is expected in Q4. The Q4 guidance calls for an AGM of 52.5% compared to 51% in Q3, and leverage is expected to grow as sales increase. 

Analysts like the look of AMD’s future 

The analysts' activity is mixed following the Q3 release, including a single price target reduction from KeyCorp and numerous reiterated ratings. However, the takeaway is bullish for several reasons, including that KeyCorp maintained its Overweight rating, and the new price target is still above the consensus estimate. The consensus is flattish compared to last month but up nearly 40% over the last year, and it will likely trend higher over the next few quarters. As it is, the consensus implies a 38% upside for this market. 

Analysts' chatter includes phrases like improved visibility, Halloween treat, on the right track, and execution. Ultimately, the analysts see the potential for AMD to gain market share from the data center leader NVIDIA NASDAQ: NVDA and server share from Intel NASDAQ: INTC. Because NVIDIA commands about 80% of the data center market, this is a significant opportunity for AMD and 1 that could add billions to revenue. 

The technical outlook: AMD is ready to rebound

Shares of AMD are down a whopping 30% from their 2023 high, but the sell-off is likely over. The market retraced the 2022/2023 rally by 50% and now shows support at a critical level. This level coincides with the 50% retracement level and highs set way back in 2021. The price action confirms support with a double-bottom at this level, and the indicators are set up to fire a reversing signal should a rebound follow. In this scenario, the market for AMD could rise above the $100 level soon and continue upward toward $136. $136 is the analysts' consensus and a new multi-year high when reached.