Advanced Micro Devices (NASDAQ: AMD) investors have experienced a remarkable year, with the chipmaker’s stock surging by an impressive 130%. This substantial outperformance of the PHLX Semiconductor Sector index, which gained 57% during the same period, has attracted significant buying activity from investors who anticipate a rapid acceleration in the company’s growth driven by artificial intelligence (AI) chip demand.
Not only have investors been bullish about AMD’s prospects, but Wall Street analysts have also shown optimism. In fact, the stock received three upgrades earlier this month from Barclays, Susquehanna Financial Group, and KeyBanc Capital Markets. These upgrades resulted in higher price targets for AMD, with Barclays raising its target to $200, KeyBanc to $195, and Susquehanna to $170. As of the closing on January 23, AMD was trading at $168.
While these price targets suggest healthy gains for AMD, not all analysts share the same sentiment. Recently, Northland Capital Markets downgraded the stock from outperform to market perform, expressing skepticism about the company’s AI business potential for rapid growth. According to Northland, AMD’s recent surge in stock price already reflects the expected AI-driven revenue gains through 2027. This raises the question of whether AMD’s stock is currently priced for perfection and if it will be able to sustain its impressive rally over the next three years.
One factor contributing to the skepticism surrounding AMD’s future performance is the decline in its earnings, which can be attributed to weakness in the personal computer (PC) market. Gartner reports a nearly 15% decrease in PC sales in 2023. AMD’s revenue from sales of central processing units (CPUs) used in desktops and laptops also plummeted by almost 40% year over year in the first nine months of 2023, to $3.2 billion. The segment experienced an operating loss of $101 million during this period, contrasting with an operating profit of $3.1 billion in the same period the previous year. Consequently, AMD’s total operating income dropped to just $59 million in the first three quarters of 2023, down from $1.4 billion in the prior-year period. Analysts project a decline in earnings per share from $3.50 in 2022 to $2.65 in 2023.
Despite these challenges, there are two key reasons why analysts anticipate a significant turnaround for AMD in 2024. Firstly, the PC market is forecasted to grow by 8% in 2024, with market research firm Canalys expecting PC shipments to increase by 10% annually from 2025 to 2027. This growth should alleviate the pressure on AMD’s bottom line caused by the decline in PC sales. The positive impact of the potential market turnaround is already evident in AMD’s financials, as its client segment revenue surged by an impressive 42% year over year in the third quarter, accompanied by an operating profit of $140 million compared to a loss of $26 million in the same period the previous year.
Secondly, AMD’s data center business is expected to experience robust gains. Although the segment’s revenue declined by 4% in the first nine months of 2023 to $4.2 billion, analysts foresee a significant increase in sales of AMD’s AI-focused accelerators this year, which could significantly boost the company’s data center business. While AMD itself projects $2 billion in revenue for 2024 from its AI GPUs, supply chain checks by KeyBanc suggest that the sales of AMD’s newly launched MI300 family of AI chips could generate $8 billion in revenue. It is worth noting that AMD’s data center revenue in 2023 primarily consisted of sales of server CPUs. Thus, the projected $8 billion revenue from AI chips would be almost entirely incremental for the data center business.
Moreover, AMD is expected to gain more market share in the AI chip market, which could contribute to solid long-term growth for the company. According to Northland Capital Markets analyst Gus Richard, AMD could capture a 13% share of the AI chip market in 2027, generating an estimated $16 billion in revenue. This suggests that AMD’s AI revenue is expected to double each year from 2024, assuming the company sells $2 billion worth of AI chips this year. However, other estimates, like the one from KeyBanc, indicate that AMD could reach the $16 billion landmark at a faster pace.
Considering these factors, even a relatively conservative forecast from Northland, which expects AMD’s overall revenue to increase to $45 billion in 2027, suggests that investors can anticipate further upside for the stock over the next three years. If AMD’s market cap is based on its five-year average sales multiple of 8, it could reach $360 billion in 2027, representing a 32% increase from current levels.
However, it wouldn’t be surprising to see AMD surpass these expectations, as companies benefitting from AI tend to receive premium valuations from Wall Street. The market could reward AMD with a higher sales multiple, resulting in even greater upside potential.
In conclusion, while AMD’s stock has experienced significant growth in the past year and faces short-term challenges due to declining earnings, there are several promising factors that could drive the company’s future success. The expected turnaround in the PC market and strong growth projections for its data center business, particularly in AI chips, provide compelling reasons to be optimistic about AMD’s long-term prospects. Investors should carefully monitor how these factors unfold in the coming years to make informed investment decisions.
