Advanced Micro Devices (AMD) posted positive Q2 results, bolstering investors’ optimism as snowballing demand for AI and data centers fuels substantial growth. Specifically, its revenue grew notably due to a triple-digit increase in data center revenue. AMD’s expansion into AI hardware also contributed to the company’s growth, evident in its successful deployment of its MI300X accelerators and EPYC CPUs.
With AMD aggressively securing market share and Wall Street maintaining a favorable growth outlook, I believe the positive sentiment backing stock will likely endure, even if its valuation seems somewhat rich. Hence, I remain bullish on AMD.
Strong Results Fueled by Data Center Growth
AMD’s second-quarter results further amplify my bullish sentiment, fueled by significant data center growth. Specifically, revenues increased by 9%, reaching $5.8 billion. While this might not seem extraordinary at first glance, the real highlight is the data center segment, which represents a notable chunk of AMD’s revenue yet is expanding at an astonishing rate.
In particular, data center revenues soared to $2.8 billion, marking an incredible 115% increase compared to the previous year. This massive increase can be attributed to the significant ramp-up in Instinct MI300 GPU shipments and a robust rise in EPYC CPU sales, highlighting AMD’s ability to actively compete in the space.
Cloud and Enterprise Adoption Propels Growth
It’s worth noting that the rather remarkable performance in the data center segment is directly linked to AMD’s increasing influence in the cloud and enterprise markets. The fourth-generation EPYC CPUs have seen substantial adoption among hyper scalers, powering an increasing share of cloud workloads.
This is evidenced by a 34% year-over-year increase in AMD-powered cloud instances, with major players like Microsoft (MSFT) employing AMD’s solutions in their AI services. The success of EPYC processors in meeting the high demands of large-scale cloud environments, such as Microsoft’s, clearly shows AMD’s competitive edge in delivering superior performance in the space. This is despite AMD lagging in other areas like graphics rendering and AI & machine learning, where NVIDIA (NVDA) clearly has the lead.
Client Segment Gains and Gaming Sector Challenges
In addition to AMD’s data center and AI segments excelling, the client segment produced vigorous results, increasing my belief in the company’s hardware. Revenue from client products rose by 49% year-over-year to $1.5 billion, driven by the success of Ryzen processors and the anticipated launch of the Zen 5 series. I believe that AMD’s innovation in these categories will further bolster its presence in the desktop and notebook markets as its processors provide improved performance and energy efficiency.
On a less favorable note, AMD’s gaming segment experienced a significant downturn, with sales plunging 59% year-over-year to $648 million. This decline is primarily due to weaker demand for semi-custom SoCs and the ongoing inventory adjustment in the console market. However, this segment represents a smaller portion of AMD’s overall revenue. Investors will likely remain focused on these more promising areas because of the company’s strong performance in data centers and AI. Thus, the weak performance in gaming shouldn’t really impact investors’ bullish sentiment.
Outlook & Valuation
The final two factors driving my bullish sentiment relate to AMD’s future estimates and valuation. As the company prepares for the latter half of 2024, its outlook remains positive. Revenues for Q3 are projected to grow approximately 15% sequentially and 16% year-over-year, driven by sustained strength in the data center and client segments. AMD’s upcoming product launches, including the next-generation MI325X and MI350 series GPUs, are also expected to fortify its competitive edge in the AI market and contribute to the top line.
Furthermore, the company is poised to close the acquisition of Silo AI, which will bolster its capabilities in AI solutions and enterprise support. With its leading position in the space, AMD seems ready to leverage the growing demand in these areas to drive revenue and earnings growth.
Regarding earnings, AMD is expected to post earnings per share (EPS) of $3.38 this year, implying a P/E of about 45.8 at the stock’s current price levels. This certainly sounds like a rich multiple. However, given the expected EPS growth in the coming years, I believe this multiple is easily justified. Specifically, Wall Street expects EPS to grow by roughly 60% in FY2025 and 35% in FY2026, meaning AMD can quickly grow into its current valuation.
Is AMD Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, AMD boasts a Strong Buy consensus rating based on 28 Buys and six Hold ratings in the past three months. At $190.90, the average AMD stock price target suggests a 23.18% upside potential.
If you’re looking for the most accurate analyst to follow when buying and selling AMD stock, Harsh Kumar of Piper Sandler is your top choice. Over the past year, his ratings have delivered an impressive average return of 30.60% and boast a remarkable 88% success rate.
Takeaway
AMD’s Q2 results highlight its impressive growth, particularly from its data center and AI segments, which drive substantial revenue increases. Despite challenges in its gaming division, AMD’s strong performance and overall progress, such as the upcoming MI325X and MI350 GPUs and the Silo AI acquisition, position it well for continued success. Although the stock’s valuation seems hefty, the rather substantial earnings growth estimates support a positive outlook. Therefore, I believe AMD’s ongoing bullish sentiment is set to be sustained moving forward.
