How High Can Advanced Micro Devices Stock Climb?

Similar to several other tech stocks, semiconductor giant Advanced Micro Devices (AMD) has delivered outsized gains to investors in 2023. AMD stock is up 86% year-to-date, compared to the 32% returns of the tech-heavy Nasdaq 100 ($IUXX). 

Valued at a market cap of $189.7 billion, AMD stock has returned 706% to shareholders in the last five years and about 2,925% since June 2013. Let’s see if the company can continue to outpace the broader markets in 2023 and beyond. 

What does Advanced Micro Devices do?

AMD is a global semiconductor company that offers server microprocessors (CPUs), graphics process units (GPUs), and data processing units (DPUs). Additionally, it provides adaptive system-on-chip or SoC products for data centers. 

The company has increased its sales from $9.8 billion in 2020 to $23.6 billion in 2022. Its gross profits increased from $4.3 billion to $10.6 billion in this period. AMD continues to invest heavily in research & development, spending close to $10 billion in the last three years, allowing it to develop game-changing products for customers. 

Despite a soft PC (personal computer) market and a challenging macro environment, AMD increased sales by 44% year over year in 2022. It completed the acquisition of Xilinx last February, increasing the company’s total addressable market by $300 billion. 

AMD’s portfolio of products is used by the largest cloud companies globally that include Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Oracle (ORCL), to power their internal infrastructures. With over 600 AMD-based cloud computing offerings and the high compute density of AMD EPYC processors, cloud companies can achieve faster insights at a lower cost. 

Moreover, automobile manufacturers such as Tesla (TSLA) and Subaru are adopting AMD products to enable new safety, connectivity, and entertainment capabilities in next-generation vehicles. AMD emphasized its technology is advancing healthcare by facilitating surgical procedures and expanding healthcare accessibility through partnerships with companies such as Intuitive Surgical. 

Further, AMD’s chips are used by gaming companies, including Sony (SONY) and Microsoft, to power their gaming consoles while providing users with an immersive gaming experience. 

AI Will be the New Growth Driver for AMD stock

AMD is well-positioned to benefit from the artificial intelligence megatrend. For instance, a Bloomberg report last month stated Microsoft has partnered with AMD to boost the latter’s chip expansion strategy. Microsoft has invested $10 billion in Open AI and already enjoys a first-mover advantage. It is now reportedly providing AMD with financial and engineering capabilities, allowing the chip maker to gain traction in a highly disruptive segment. 

The demand for data center semiconductors should grow at an exponential pace in the upcoming decade as companies train their AI models. While Nvidia (NVDA) enjoys a 90% share in this segment, AMD is looking to gain traction by introducing a wide range of products. 

In Q1 of 2023, the company revealed the LUMI supercomputer, which is powered by AMD, had just got done training the largest finished language model. LUMI is the fastest supercomputer in Europe and the third-largest supercomputer in the world. 

AMD’s much-awaited graphics card, called the MI300, will be launched later this year and will be used to power LUMI. The MI300 is expected to increase performance by 8x and should be introduced in the second half of 2023. 

In May 2023, AMD announced the AMD Data Center and AI Technology Premier, an event slated to be held next week. It will showcase the company’s growth strategy and expanding product portfolio as well as capabilities for data center and AI, providing investors with relevant insights and AMD’s long-term potential.

The Near Term is Challenging for Advanced Micro Devices

In Q1 of 2023, AMD reported revenue of $5.4 billion, a decline of 9% year over year. Its adjusted earnings also fell 47% to $0.60 per share. The company forecasts sales to fall by 19% to $5.3 billion in Q2 as the PC segment remains under pressure. 

Analysts expect sales to fall by 3% year over year to $23 billion in 2023, while adjusted earnings might narrow to $2.17 per share from $2.99 per share in 2022. So, AMD stock is priced at 54x forward earnings, which is quite steep. But analysts also expect earnings to surge 52.5% to $3.31 per share in 2024. 

Given AMD’s lofty valuation, buying the stock after a stellar rally may seem a high-risk bet. In addition to recession fears, a slow PC market and competition from NVIDIA will weigh heavily on AMD stock. While AMDs data center business was flat in Q1, Nvidia increased sales by 14% in the March quarter. 

Analysts are Bullish on AMD Stock

Earlier this week, Piper Sandler (PIPR) analyst Harish Kumar raised his price target for AMD to $150 from $111 and maintained an “overweight” rating on the stock. Citigroup (C) analyst Christopher Danely also increased AMD’s price target from $85 to $120 and maintained a “neutral” rating. Last month, Bank of America (BAC) too raised AMD’s price target from $120 to $135.  

The Final Takeaway

AMD needs to keep surpassing consensus estimates to maintain its high valuation. It will also have to fight off competition and gain market share from Nvidia in the data center segment. However, AMD’s partnership with Microsoft, its focus on product development, and an expanding portfolio of AI-powered solutions should drive top-line growth in the upcoming decade.

Though 18 of the 27 Wall Street analysts rate AMD a 'strong buy,’ the mean price target is $102.48, which is 15% lower than where the stock is currently trading.

It's the opinion of some economists and strategists that large-cap tech stocks, like AMD, are currently in or entering a bubble. In a CNBC interview yesterday, JPMorgan strategist Marko Kolanovic warned that the recent rally in tech stocks is "too exceptional." He said, "It's hard to say that it cannot go more, but we think it's in a little bit of a bubble domain already."

Even with the AI opportunities AMD will be able to take advantage of, the stock looks overvalued at current levels. Therefore, in my opinion it is logical to remain on the sidelines for now and wait for a pullback in AMD before entering a new position. 

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