While Advanced Micro Devices stock (AMD) has rallied by about 15% over a year, it still trades roughly 40% below its 52-week high of $227.30. I believe this can be attributed to investors harboring a degree of skepticism about AMD’s future potential. Nevertheless, the advanced computing powerhouse is set for a rebound driven by a compelling growth story that is just now beginning to unfold. The company is now entering a phase of accelerated revenue growth, fueled by rising demand across multiple channels, a trend likely to persist well into Fiscal 2025. This should position Advanced Micro for significant EPS growth, indicating the stock is likely undervalued. For these reasons, I am bullish on AMD.
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Solid Revenue Growth Marks AMD’s Comeback
Allow me to set the scene by highlighting AMD’s recent resurgence in sales growth, marking a remarkable turnaround from last year’s lackluster performance. As a reminder, the company went through a couple of quarters of underwhelming or even negative growth in Fiscal 2023. Yet, it is now experiencing increasing demand across the board, driving revenue acceleration. This trend was clearly visible in the most recent Q3 earnings report, with AMD posting an 18% year-over-year revenue growth rate, much higher than the rather soft 4% growth posted in the same quarter last year.
AMD’s Q3 growth was primarily propelled by record Data Center segment revenue, which skyrocketed by 122% year-over-year to reach $3.5 billion. A significant factor was the rising adoption of AMD EPYC CPUs, particularly by major cloud providers. Companies like Meta (META) and Microsoft (MSFT) selected EPYC processors to support cloud services, which fueled demand and gave AMD notable pricing power.
In the meantime, the Client segment’s revenues increased by 29% year-over-year due to strong demand for Ryzen processors, especially the new “Zen 5” CPUs. In the less exciting part of the report, it’s worth noting that AMD’s gaming segment posted a year-over-year sales decline of 69%, mainly due to reduced semi-custom revenue as gaming console demand softened. However, the Data Center and Client segments more than offset this decline, driving the bulk of this quarter’s success.
AMD’s Earnings Driven by High-Margin Data Center Products
What was more impressive than AMD’s revenue growth in Q3 was its margin expansion and, therefore, its earnings growth. As you may know, AMD’s business model, although highly cyclical, benefits from being extremely scalable. Consequently, it allows the company to significantly boost profitability as revenue grows. This scalability was reflected in Q3, with the company’s operating margin rising to 25%, up from 22% last year. In this case, launching its latest EPYC and Ryzen processors boosted AMD’s adjusted gross margin, which rose to 54% in Q3, up from 51% last year.
Moreover, AMD benefited from improved operational efficiency and a better product mix, largely due to the rising demand for its EPYC data center products, which boast higher profit margins. Given the current momentum and outlook for Q4, consensus estimates now project EPS of $3.33 for this year, implying 25.6% year-over-year growth.
AMD Is Positioned for Strong Growth in 2025
Looking ahead, AMD seems well-positioned to sustain its growth momentum into 2025. In fact, current trends point to an even faster pace of growth next year. Analysts expect a 27% rise in revenue for 2025, a significant jump from the 13.3% growth expected this year. Similarly, EPS is projected to rise by 55% in Fiscal 2025, compared to the 26% growth expected for Fiscal 2024. Based on these estimates, AMD shares are trading at 27.5 times next year’s expected EPS. I believe this is a compelling valuation given AMD’s key role in driving current tech advancements.
Specifically, AMD’s strong foothold in the AI and data center markets supports these growth projections and may allow for a valuation expansion in the near term. The company continues progressing rapidly with its EPYC processors in cloud computing, benefiting from the growing adoption of major players like Microsoft and Google (GOOGL), as I mentioned earlier.
AI, in particular, remains an exciting area, with AMD’s latest Instinct MI300X accelerators gaining traction among industry leaders such as Meta and Oracle (ORCL). Along with other factors, like AMD’s partnerships and current pipeline, I believe the market has yet to fully appreciate the scale of the growth opportunity. As these dynamics come into focus and the market starts to digest the ongoing bottom-line acceleration, AMD could undergo a valuation multiple expansion, offering investors meaningful upside potential.
Is AMD Stock a Buy?
Looking at Wall Street’s sentiment on the stock, AMD features a Strong Buy consensus rating based on 23 Buys and seven Hold ratings in the past three months. At $185.46, the average AMD stock price target implies a 34.66% upside potential.
For the best guidance on trading AMD stock, look to Hans Mosesmann. He is the most accurate analyst covering the stock (on a one-year timeframe), boasting an average return of 51.9% per rating and an outstanding 75% success rate.
Final Thoughts
To sum up, I believe that despite its somewhat mixed share price performance, AMD’s rebound in revenue and earnings growth, driven by rising demand in data center and AI markets, set the stage for compelling returns. With the rising adoption of EPYC CPUs and cutting-edge AI solutions, the company seems to be capitalizing on surging demand across key technology sectors.
Given that the stock is likely trading at a compelling valuation relative to these catalysts, AMD could offer notable upside potential as it enters a phase of transformational expansion well into 2025.
