Semiconductor chipmaker Advanced Micro Devices (NASDAQ: AMD) has benefited from the rise of artificial intelligence (AI). Demand for the company’s AI-tailored chips spurred its stock to skyrocket from under $100 per share last year to a 52-week high of $227.30 in March.
But after the company announced earnings for its fiscal first quarter, which ended March 30, AMD’s shares experienced a drop. Does this create an opportunity to pick up shares? Or do reasons exist to hold off buying?
To get to an answer, it’s necessary to see where AMD is at currently. Then, couple that with an assessment of its potential for business growth in the years to come.
Why AMD stock declined recently
AMD’s share price dropped after the company’s fiscal first-quarter earnings report failed to meet Wall Street expectations. That reaction may be overblown.
AMD achieved $5.5 billion in Q1 revenue, up 2% year over year. The company previously forecast first-quarter revenue of about $5.4 billion in its outlook.
AMD also estimated its fiscal second-quarter sales will reach around $5.7 billion, an increase from the prior year’s $5.4 billion.
Considering the red-hot demand for AI-enabled chips, these first-half numbers may seem to reflect muted year-over-year growth. So, Wall Street’s reaction is understandable.
But let’s look at AMD’s potential over the long run. To that end, consider AMD’s success with its AI chips, which is reflected in rising sales in its data center and PC divisions.
AMD’s areas of strength and weakness
AMD’s data center business experienced record revenue of $2.3 billion in Q1, an 80% jump over the prior year. The PC division reached $1.4 billion in Q1 sales, up 85% year over year.
Together, these segments accounted for $3.7 billion of fiscal Q1’s $5.5 billion in revenue. Both divisions enjoyed a sales boost thanks to the advent of AI.
AMD’s data center business provides AI-enabled chips for computer servers. These servers are owned by clients such as Amazon and Alphabet to drive their cloud computing solutions.
Meanwhile, the company’s AI chips for PCs enjoyed strong sales as customers, such as Microsoft, purchased AMD’s products to develop new AI-powered laptops and desktops.
Given the outstanding growth of the data center and PC divisions, why did AMD’s Q1 revenue grow only 2% above the prior year? The other parts of its business suffered from the cyclical nature of the computer hardware industry.
AMD’s video games division saw Q1 sales drop from $1.8 billion last year to $922 million. This was due to weak demand, which is understandable, given that major gaming consoles, such as Microsoft’s Xbox, have been on the market for a few years.
The company’s products for the industrial sector also experienced a sales decline due to excess levels of chip inventory among its clients. Q1 revenue in this division dropped to $846 million from $1.6 billion in the prior year.
AMD’s long-term outlook
For investors thinking long-term, AMD stock holds plenty of promise. The company’s CEO, Lisa Su, noted, “we are still in the very early stages of what we believe is going to be a period of sustained growth driven by an insatiable demand for both high-performance AI and general purpose compute.”
Industry forecasts support her assessment. The AI sector is expected to hit $184 billion in 2024, up from $136 billion last year and expanding to $827 billion by 2030.
This industry growth is reflected in the sales of AMD’s AI chips, which are steadily rising. Its fiscal Q1 data center revenue of $2.3 billion was a 2% increase from the previous quarter, and nearly double the $1.3 billion earned in the prior year.
The company also anticipates demand in its PC division to increase. Lisa Su stated, “We see AI as the biggest inflection point in PCs since the internet with the ability to deliver unprecedented productivity and usability gains.”
Moreover, AMD estimates revenue in its industrial business will improve in the second half of 2024. Adding to this, Wall Street analysts believe the stock has upside. Their consensus is an overweight rating for AMD stock with a median share price of $195.
With AMD shares beaten down after earnings and its AI prospects looking attractive, now is a good time to pick up the stock and hold onto it for the long term.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Advanced Micro Devices, Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Is AMD Stock a Buy? was originally published by The Motley Fool
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