AMD’s post-earnings slide is a buying opportunity. Here’s why

On October 31, 2024By Littum

Advanced Micro Devices posted a solid set of third-quarter results on Tuesday, thanks to strong sales in the data center and PC markets. But shares fell more than 7% in extended trading as investors wanted to see faster growth in its AI chip business. We take the long-term view here. Revenue in the three months ended Sept. 28 rose 18% year over year to $6.82 billion, topping estimates of $6.71 billion, according to LSEG. Adjusted earnings per share (EPS) rose 31% year-on-year to 92 cents, matching estimates LSEG data showed. The market reaction to AMD’s earnings continues the up-and-down month for AMD shares, which in recent sessions had regained their footing after pulling back more than 10% following their AI-focused investor event on October 10. We bought this pullback twice, on October 15th and then 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 their MI300 AI chips — is still on track, so we view the post-earnings pullback as a buying opportunity. We reiterate our 1 rating and price target of $200 per share. stock. 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 No. 2 player in a booming market currently dominated by Nvidia, a fellow member of the club. AMD CEO Lisa Su expects the total addressable market for AI chips—sometimes referred to as AI accelerators because of their computational capabilities—to grow by more than 60% annually to $500 billion by 2028. We believe that Nvidia remains the king of the market, but AMD should also be able to carve out a solid share. Given how integral these AI chips are to AMD’s growth, we were pleased that management on Tuesday night raised its full-year sales forecast to over $5 billion. That’s a $500 million increase from guidance offered in late July and well above the $2 billion it expected at the start of the year. Su said better capacity across the entire supply chain contributed to the positive guidance revision. Another factor: AMD’s chips passed some performance milestones with customers, Su said. While the MI300 guidance was a critical part of the earnings call, investors widely expected this update. That’s why the stock couldn’t pare its big after-hours losses despite the disclosure. Still, we are not deterred in our specialty. We believe Su’s AI roadmap — outlined at its AI event earlier this month — will lead to significant sales 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 the fast-growing market as a new personal computer refresh cycle gets under way. AMD CEO Lisa Su has also proven to be one of the best leaders in the chip industry. Competitors: Intel, Nvidia and Club with Broadcom Weight in Club Portfolio: 2.98% Last Purchase: Oct 23 2024 Started: July 15, 2024 “We feel very good about the market from everything we see when we talk to customers,” Su explained in her high-level commentary on 2025. “There is still significant investment in trying to to build the infrastructure required across all AI workloads.” In his optimism for next year, Su also cited AMD’s plans to release next-generation AI products on an annual basis and expand relationships with customers. To be sure, supply remains a limiting factor, with Su saying the environment “will continue to be tight” over the next few quarters into 2025. Still, Su said AMD has “planned significant growth into 2025.” Sounds like a high quality issue. Another reason for some of the disappointment on Tuesday could be the lack of new customer announcements. It was also something investors wanted to see at the AI event in October. However, we think it’s only a matter of time before more cloud customers catch on. Plus, the acquisition of ZT Systems’ engineering team, announced in August, should help AMD build out its AI infrastructure. We look forward to hearing more about the quarter from Su Wednesday morning on CNBC. Jim Cramer is set to interview her on “Squawk on the Street” during the 9 am ET hour. Quarterly Comment Sales in AMD’s all-important data center segment came in at $3.55 billion, beating estimates and more than doubling year over year. Behind the growth was the strong increase in AI chip shipments 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 conference call. Microsoft uses MI300 accelerators to power their internal workloads and for Copilot services. And Meta deploys 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 share in the CPU server market as the company’s gains accelerated and cloud providers expanded their use of EPYC-branded chips. AMD’s data center business now accounts for 52% of the company’s revenue, up from 37% in the fourth quarter of 2023. AMD’s client segment — home to sales of processors for desktop and notebook computers — was the biggest bright spot in the quarter. The business generated a better-than-expected $1.88 billion in revenue, up 29% year over year. Meanwhile, operating income nearly doubled to $276 million. The company credited strong demand for its Zen 5 Ryzen processors for the revenue growth. Looking ahead to 2025, Su expressed optimism that the PC market could grow in the mid-single digits. Catalysts for this growth include AI-infused PCs – AMD has a strong presence there – and the business update of the “hundreds of millions” of Windows 10 PCs that will no longer receive technical support from Microsoft. On the other hand, AMD’s gaming unit – home to chips for game consoles and 3D graphics – was worse than expected, falling 69% from last year to $462 million. The market should not care about this result. This division is such a small part of the story. Embedded — the segment that houses Xilinx, which AMD acquired in 2022 — was slightly better than expected with revenue of $927 million. That number may be down 25% year-over-year, but the 8% increase on a sequential basis is a good sign that the company is gradually recovering. These chips are sold to multiple end markets ranging from telecommunications to industrial and automotive. Although the embedded market has declined, the company believes design gains are up more than 20% year-over-year this year, positioning it to grow faster than the overall market in the coming years. Guidance AMD said it expects fourth-quarter revenue of $7.5 billion, plus or minus $300 million. Analysts were expecting a $7.55 billion guide, according to FactSet, so that’s a slight miss. Revenue is expected to increase 10% sequentially, driven by growth across data center, client and gaming. Fourth quarter adjusted gross margins are expected to be 54%, which would be a slight quarter-over-quarter improvement and slightly better than Wall Street expectations. As noted, AMD raised its forecast for AI chip sales in 2024 to more than $5 billion, up $500 million from guidance offered in July. (Jim Cramer’s Charitable Trust is long AMD. See here for a complete list of the stocks.) As a subscriber to the 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 share in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR DILUTION ARE GUARANTEED.

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

CostFoto | Nurphoto | Getty Images

Advanced micro-devices on Tuesday posted a solid set of third-quarter results thanks to strong sales in the data center and PC markets. But shares fell more than 7% in extended trading as investors wanted to see faster growth in its AI chip business. We take the long-term view here.