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The decline in AMD’s post-earnings numbers presents a buying opportunity. Here’s why

Caradoc Wyn October 30, 2024

Advanced Micro Devices reported solid third-quarter results on Tuesday, thanks to strong sales in the data center and PC markets. However, shares fell more than 7% in extended trading as investors sought faster growth in the AI chip business. We think long-term here. LSEG said revenue rose 18% year-on-year to $6.82 billion in the three months ended Sept. 28, beating estimates of $6.71 billion. Adjusted earnings per share (EPS) rose 31% on an annual basis to 92 cents, in line with estimates in LSEG data. The market’s reaction to AMD’s earnings has been up and down for the month for AMD shares, which have regained their footing in recent sessions after a decline of more than 10% following the AI-focused investor event on October 10. We bought this dip twice, on October 15th and again on October 23rd. AMD YTD Mountain AMD’s year-to-date stock performance. Bottom line: The main part of our AMD thesis – rapidly growing sales of its MI300 AI chips – is still on track, so we view the post-earnings decline as a buying opportunity. We reiterate our 1 rating and our price target of $200 per share. The MI300 is AMD’s high-performance processor used in data centers to run and train artificial intelligence applications. We believe these products will make AMD the second-largest player in a booming market currently dominated by Nvidia, another club holding company. AMD CEO Lisa Su expects the total addressable market for AI chips – sometimes called AI accelerators because of their computing capabilities – to grow by more than 60% annually to $500 billion by 2028. We’re confident that Nvidia will remain king of the market, but AMD should also be able to carve out a solid share. Given the importance of these AI chips to AMD’s growth, we were pleased to see management on Tuesday evening raised its full-year revenue forecast to over $5 billion. That’s a $500 million increase over the end-July forecast and well above the $2 billion expected at the start of the year. Su said better capacity across the supply chain contributed to the positive revision of the guidelines. Another factor: AMD’s chips have hit some performance milestones with customers, Su said. While the MI300 forecast was a crucial part of the earnings release, investors were largely expecting this update. Therefore, despite the disclosure, the share was unable to make up for its high after-market losses. Nevertheless, we do not allow ourselves to be deterred by our thesis. We believe Su’s AI roadmap – unveiled at its AI event earlier this month – will drive significant revenue growth in 2025 and beyond. Advanced Micro Devices Why We Own It: AMD’s relatively new AI chip, the MI300, is carving out a niche in this fast-growing market while kickstarting a new PC refresh cycle. AMD CEO Lisa Su has also proven to be one of the chip industry’s top executives. Competitors: Intel, Nvidia and Club hold Broadcom. Weight in the club portfolio: 2.98%. Last Purchased: Oct. 23, 2024. Initiated: July 15, 2024. “We are very happy with the market based on what we are seeing in conversations with customers,” Su said in her high-profile 2025 commentary. “There is still significant investment being put into trying to build the infrastructure required for all AI workloads.” In her optimism for next year, Su also noted AMD’s plans to launch next-generation AI products annually expand relationships with customers. Of course, supply remains a limiting factor, and Su said the environment will remain “tight” over the next few quarters through 2025. Still, Su said AMD has “significant growth planned through 2025.” This sounds like a high quality problem. Another reason for Tuesday’s disappointment could be the lack of new customer announcements. That’s what investors also wanted to see at the AI event in October. However, we believe it is only a matter of time before more cloud customers gain traction. In addition, the acquisition of ZT Systems’ engineering team announced in August should help AMD expand its AI infrastructure. We look forward to hearing more about Su’s quarter on CNBC Wednesday morning. Jim Cramer will interview her on “Squawk on the Street” at 9 p.m. ET. Quarterly Commentary Revenue in AMD’s key data center segment came in at $3.55 billion, beating estimates and more than doubling year-over-year. Behind the growth was the sharp increase in shipments of AI chips to cloud customers, original equipment manufacturers (think companies that make servers like Dell Technologies) and AI companies. Club holdings Microsoft and Meta Platforms were two relationships highlighted on the call. Microsoft uses MI300 accelerators to power its internal workloads and for Copilot services. And Meta uses the MI300 exclusively to handle all live traffic for its most demanding model in the Llama family. The old part of AMD’s data center business – selling traditional central processing units in servers – also had a good quarter. The company said it gained market share in the CPU server market as enterprise growth increased and cloud providers expanded their use of EPYC-branded chips. AMD’s data center business now accounts for 52% of companywide revenue, up from 37% in the fourth quarter of 2023. AMD’s customer segment – which sells processors for desktop and laptop computers – was the biggest bright spot in the quarter. The company generated better-than-expected revenue of $1.88 billion, up 29% year-over-year. Meanwhile, operating profit nearly doubled to $276 million. The company cited strong demand for its Zen 5 Ryzen processors for the sales growth. Looking ahead to 2025, Su was optimistic that the PC market could grow in the mid-single digits. Catalysts for this growth include AI-powered PCs – AMD has a strong presence there – and the company’s refresh of the “hundreds of millions” of Windows 10 PCs that no longer receive technical support from Microsoft. On the other hand, AMD’s gaming division – home to chips for gaming consoles and 3D graphics – performed worse than expected, falling 69% year over year to $462 million. The market should not care about this outcome. This division is only a small part of the story. Embedded – the segment with Xilinx, which AMD acquired in 2022 – performed slightly better than expected with revenue of $927 million. This number may be down 25% year-over-year, but the 8% sequential increase is a good sign that the company is gradually recovering. These chips are sold in multiple end markets ranging from telecommunications to industrial to automotive. Although the embedded market is declining, the company expects design profits to have increased more than 20% annually this year, meaning it will grow faster than the overall market in the coming years. Forecast: AMD expects fourth-quarter revenue of $7.5 billion, give or take $300 million. Analysts had expected a benchmark of $7.55 billion, according to FactSet, so it’s a bit of a miss. Revenue is expected to increase 10% sequentially, driven by growth in data center, client and gaming. Fourth-quarter adjusted gross margin is expected to be 54%, which would be a small improvement from the previous quarter and slightly better than Wall Street expectations. As noted, AMD has raised its 2024 AI chip sales forecast to more than $5 billion, an increase of $500 million from the forecast it provided in July. (Jim Cramer’s Charitable Trust is long on AMD. A full list of stocks can be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.

Visitors walk past the AMD booth at the Mobile World Congress 2024 in Shanghai, China, June 26, 2024.

CostPhoto | Photo only | Getty Images

Advanced micro devices reported solid third-quarter results on Tuesday, thanks to strong sales in the data center and PC markets. However, shares fell more than 7% in extended trading as investors sought faster growth in the AI chip business. We think long-term here.

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The decline in AMD’s post-earnings numbers presents a buying opportunity. Here’s why

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Caradoc Wyn

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The decline in AMD’s post-earnings numbers presents a buying opportunity. Here’s why

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Caradoc Wyn

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