AMD Remains a Strong AI Growth Opportunity Despite being Second to Nvidia

Shares of computer processor and graphics card maker Advanced Micro Devices (AMD) have gained almost 25% following a strong Q2 earnings report from July, the 50 bps Fed rate cut, and other favorable news flow. AMD continues innovating with consistent annual AI accelerator and processor launches. Despite playing second fiddle to Nvidia (NVDA), AMD is witnessing rapid growth in its AI-driven Data Center revenues which should continue boosting both revenue and margins. I presented a bullish outlook on AMD in early July and I continue to hold that sentiment.

Advancing AI Event is a Potential Catalyst for AMD

Investors are eagerly awaiting AMD’s annual “Advancing AI” event on Thursday October 10, where the company is expected to showcase its latest, next-generation Instinct GPU accelerators and EPYC server processors. AMD will also provide more details on the MI300 series accelerators, which debuted in Q4 2023. AMD has already secured major clients, including Microsoft (MSFT) and Meta Platforms (META) for its products.

AI technology has taken the world by storm and top technology firms are eagerly waiting for the latest processors, servers, and accelerators. If the showcase of new technology can impress the tech world, it could act as a huge catalyst for AMD stock. In the short-term, if history were to repeat itself, AMD shares may see some boost after its AI event. After a similar event held in December 2023, AMD stock gained 19% in the month that followed.

AMD is AI’s Number Two, With a Huge Space for Growth

The growing demand for AI-enabled devices across tech industries positions AMD well to capitalize on AI upgrades in smartphones, PCs, and more. AMD is the closest competitor to AI stalwart NVDA. NVDA continues to lead in the AI and GPU markets with over 80% market share. Nvidia cannot meet all of the global demand alone. AMD is poised to capture a share of the growing demand for AI accelerators, which is a good reason for to be bullish. Furthermore, AMD’s competitive pricing (AMD’s GPUs are a cheaper alternative to NVDA’s GPUs), a wide variety of offerings, and performance improvements could help it gain market share over time. 

Recent major wins for AMD  include addition of Oracle (ORCL) and Sony (SONY) to its client list. Oracle has chosen AMD’s MI300X accelerators to power its latest Oracle Cloud Infrastructure (OCI) Compute Supercluster. Furthermore, AMD won a contract against Intel (INTC) to design and fabricate Sony’s PlayStation 6 chips. This was a major win as the deal could add billions of dollars in revenues for AMD.

If AMD continues to add top-notch tech clients to its radar, it will provide a boost to future revenues as well the stock price. Incremental market share gains will add billions in revenues at AMD and likely boost margins and profitability. It is no wonder analysts expect AMD to attain significant revenues and EPS growth in the coming quarters.

A Discussion of AMD’s Strong Earnings and Promising Forecasts

AMD is expected to release its third-quarter earnings on October 29. Wall Street expects AMD to report EPS of $0.92, reflecting an impressive 33% sequential growth from its Q2 EPS of $0.69. Taking a brief look back at the Q2 results, AMD’s EPS came in one cent ahead of analysts’ estimates. The figure was 19% higher than the Q2FY23 figure of $0.58 per share. Moreover, Q1 revenues grew 9% year-over-year to $5.8 billion, beating expectations. Gross margins also reported solid expansion of 300 basis points to 49% from 46% reported a year ago.

CEO Lisa Su, whose insider trading activity is presented here at TipRanks, projected her optimism in stating; “Our AI business continued accelerating and we are well positioned to deliver strong revenue growth in the second half of the year led by demand for Instinct, EPYC, and Ryzen processors.”

Crucially, Data Center revenue growth continued to impress, growing a whopping 115% year-over-year to a record $2.8 billion during Q2, driven by a big ramp-up of Instinct GPU shipments, and strong growth in 4th Generation EPYC processors. On top of that, Client segment revenue also jumped 49% to $1.5 billion driven by sales of Ryzen processors, that power AI-enabled PCs.

AMD’s Q3 revenue guidance came in ahead of street expectations. For Q3, total revenue is expected to be around $6.7 billion (+/- $300 million). The firm’s adjusted gross margin is forecast to be approximately 53.5%.

AMD’s Valuation is Expensive but Justified

Unsurprisingly, AMD is trading at a high forward P/E multiple of about 50x. However, that valuation is actually slightly higher than the AI prodigy Nvidia, which trades at a forward P/E of about 46x. Some readers may be wondering what the reason for this could be. From my perspective, investors are expecting that AMD will have more forward upside than NVDA given that its AI growth story is just beginning to unfold. Therefore, I continue to be optimistic about the future for the stock.

Is Advanced Micro Devices Stock a Buy, According to Analysts?

Let’s consider whether it’s worth buying AMD at current levels. Wall Street analysts expect AMD’s EPS to come in at approximately $5.44 for FY2025, with expectations of around $7.35 in FY2026. If AMD maintains the same forward P/E multiple of 47x by next year, its share price could reach $345, double the current price.

Stating it differently, AMD shares are trading at a 2025 forward P/E of 23x, which is quite a significant discount to its five-year historical average of 43x. Therefore, it makes sense to consider buying AMD stock at current levels, given the strong growth potential in the AI space.

Wall Street analysts maintain a positive outlook on Advanced Micro Devices stock. The stock boasts a Strong Buy consensus on TipRanks, with 25 Buy ratings and six Hold ratings from 31 analysts. The average AMD price target of $188.04 implies about 10% potential upside from current levels.

Conclusion: Consider AMD for Long-Term AI Potential

There is a strong and growing demand for AI across various industries as companies work to develop their own data center infrastructure. This suggests sustained growth in sales of AI chips, GPUs, and CPUs for the foreseeable future. AMD’s innovations in AI and data center solutions position it well for this growth, and its competitive pricing will likely help it capture more market share.

CEO Lisa Su has transformed AMD into a formidable No. 2 player in the AI market, and the stock has gained more than 450% in the past five years. As AI demand continues to grow, AMD remains well-positioned to benefit, particularly with the upcoming wave of AI-enabled PC upgrades. Regardless how the upcoming AI event unfolds, I believe that AMD offers strong long-term potential for investors. Therefore, I am bullish AMD stock at current levels.

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