AMD Gains Momentum With AI: Can It Beat Expectations?

Key Points

• Advanced Micro Devices is well-positioned to increase AI sales and outperform estimates this year. 
• New product launches ensure growth will be sustained at a high level in 2025. 
• Analysts are raising the price targets for the stock, forecasting the stock will return to the $200 level. 

Advanced Micro Devices NASDAQ: AMD is gaining traction with AI. NVIDIA NASDAQ: NVDA remains the leader because of its first-mover advantage, but there are other significant players, and AMD is the leader. While NVIDIA commands an estimated 95% of the AI data center market, AMD carries most of the remainder and can regain the share lost due to NVIDIA’s boom. That’s worth more than 1000 basis points in market share growth on top of robust organic industry growth to drive revenue, earnings, and shareholder value. Industry growth is still accelerating. AMD CEO Lisu Su upped her estimates at the investor day event, expecting a 60% CAGR over the next five years. 

Aside from company commentary, there is solid evidence of the demand for AMD AI-oriented chips. Companies from Hewlett Packard Enterprises NYSE: HPE to Meta Platforms NASDAQ: META and Oracle NYSE: ORCL are using large quantities of them to build out enterprise-quality HPC applications requiring the lowest latency. Oracle’s news includes a supercluster that can link over 16,000 MI300Xs, using a suite of tools provided by AMD to operate them. Hewlett Packard Enterprise will package eight MI325X and two EPYC CPUs into its latest servers, the HPE Proliant XD685, for AI service providers and large model builders.

The suite of tools is critical to AMD’s success; the ROCm suite is comparable to NVIDIA’s CUDA, allowing programmers to harness the power of its GPUs for AI computing needs. The takeaway is that NVIDIA was first to the game. Still, AMD is positioned to catch up and will post accelerating results, outpacing consensus figures and driving shareholder value over the next four to eight quarters. 

AMD Sets Low Bar With Q3 Guidance Despite 15% Growth Forecast

AMD's Q3 guidance is solid but sets a low bar to clear. The company forecasted $6.71 billion in net sales, a 15% gain and an acceleration from the previous quarter but slower than the pace of industry growth and AI peers. AMD growth will be supported by the data center segment, which grew at a triple-digit pace in Q2 and is expected to be sustained in Q3, offset by slower client segment growth and gaming segment normalization. 

The data center is an increasingly important business segment, growing to nearly 50% of revenue in the year's first half, and contribution gains are expected to continue. Gaming revenue is likely to fall in Q3 compared to last year, but the headwind is diminishing. The pace of contraction should slow in Q3 and Q4 and revert to growth in 2025, becoming a tailwind for the business.  Among the risks for AMD investors is government regulation. The U.S. government is considering export bans to risky countries to limit the spread of AI capability among bad actors, potentially limiting the global addressable market.

The guidance will drive the market regardless of growth and outperformance in Q3. The consensus for the year implies another 15% gain in revenue and a widening margin, likely underestimating demand for AMD products. Among the calendar Q3 news highlights is the launch of Ryzen AI Pro 300 series chips designed to enhance Microsoft Copilot AI Assist. The chips are 40% faster than the leading competition. They are expected to increase enterprise workload productivity by up to 14%, which is a compelling factor for IT budget managers and business planning. Other highlights include the Turin EPYC data center CPUs that rival NVIDIA’s Blackwell, which is expected to launch in Q1 2025. 

Analysts Eye AMD’s Q3 Report as a Catalyst for Recovery

Analysts have been raising their estimates for AMD’s stock price while lowering estimates for earnings. The consensus is up more than 40% since late 2023 and rising ahead of the Q3 earnings release, forecasting a nearly 20% upside from the $160 level. The latest updates reaffirm targets raised following the Q2 release and put the stock in the $180 to $200 range to align with the consensus. A solid earnings report should catalyze the market to move higher. 

The price action in AMD stock is tepid following the October investor day and product announcements. The market is falling, down nearly 10% from the recent peak, and may continue to fall until the earnings report is released. The critical support target is near $152.50 and will likely be reached soon, providing an attractive entry point for traders and investors. If market support is not sustained at that level and a lower low is set, a move to $140 is likely, and $120 is possible.