AMD Earnings on Jan 30: Can AMD Reach the $400B AI Chip Market by 2027?

U.S. stock market bulls celebrated this week as the S&P 500, Nasdaq 100, and Dow Jones Industrial Average made new all-time highs. The best-performing industries are SEMICONDUCTORS!!!

Considering the different perceptions of the stock, this time TigerPicks chose $Advanced Micro Devices(AMD)$ to have a fundamental highlight to help users understand it better.

$Advanced Micro Devices(AMD)$

Advanced Micro Devices' earnings are scheduled for January 30, and due to its advantageous position in AI and other segments, AMD may hit another home run. Last quarter, AMD surpassed revenue estimates by over $100 million, and this quarter could be even better. Some people may doubt AMD's AI potential, but AMD's CEO Lisa Su forecasts that the vertical AI chip market will grow from $45 billion last year to $400 billion in 2027.

The increasing demand for the power of AI should benefit AMD greatly. AMD is one of several companies capable of supplying the highest-quality GPUs to power the growing AI industry. This dynamic should enable AMD to increase its top line substantially. Moreover, AMD's rapid sales growth should translate to considerable earnings, EPS expansion, and a much higher stock price in future years.

AMD's Massive AI Market Opportunity

It's crucial to recognize that AMD is one of the primary beneficiaries of the AI industry. Like Nvidia (NVDA), AMD produces the GPUs at the heart of the AI revolution. We can look at these guys as the picks and shovels in the trenches doing all the hard work, powering the massive supercomputers, servers, and other hardware needed to harness the true power of AI. AMD's MI 300 series accelerators are the perfect fit to power AI servers and compete well with Nvidia's H100 GPU chip.

Global AI Market Size

AI market

AI market (Statista.com )

With fewer than $250 billion in sales last year, we're still very early in the AI revolution phase. This time frame may be around the third inning, with a long ball game ahead. AI industry sales should increase dramatically to approximately $1.85 trillion by 2030. Considering that the broader AI segment could be around $800 billion to $1 trillion by 2027, Lisa Su's projection for a $400 billion AI chip market makes sense.

AMD's Legacy Businesses to Recover

Also, AMD should experience growth in other AI-related chip areas, like CPUs associated with future PC sales. AMD should also benefit from its legacy businesses. AMD recently faced slow or declining growth in its graphics and enterprise processor businesses due to challenging macroeconomic factors, high interest rates, inflation, elevated costs, and sluggish growth. However, a return to an expanding economy, more accessible monetary policy, lower rates, and other constructive factors should contribute to growth in AMD's legacy segments.

Substantial Financial Recovery Ahead

AMD segment finances

AMD segment finances (ir.amd.com)

Like many companies, AMD went through a transitory slowdown phase due to a slow macroeconomic environment, inflation, higher costs, high interest rates, and other temporary factors. AMD's gaming segment got hit especially hard. Last quarter, gaming revenue came in at around $1.5B, down by 7.5% from the same quarter a year ago.

And it's not just last quarter. For the first three quarters of 2023, gaming revenue was $4.844B, down by 6% from the first three quarters in 2022. AMD's client segment was also in a transitory slump last year. 2023 first three-quarter revenue was $3.19B on the client side, nearly a 40% drop from the first three quarters in the previous year.

The good news is that we're seeing a recovery. Client revenue came in at $1.453B last quarter, a sharp 42% jump from the $1.022B in Q3 2022. Embedded revenue also improved, with $4.264B in sales in the first three quarters of 2023, a 35% YoY increase. Data center revenue was $4.214B for the first three quarters, a 4% YoY drop. However, we should see a significant rebound in AMD's data center segment as it brings its powerful MI 300 series accelerators to market this year.

For the first three quarters of 2023, AMD's total revenues were $16.5 billion, an 8% decline from the $18B in revenues we saw in the first three quarters of 2022. Yet, last quarter, AMD put up $5.8B in revenues, a 4% increase from the same quarter a year ago. Therefore, we're witnessing signs of a recovery.

As the economy expands, inflation moderates, costs level out, and the Fed introduces a more accessible monetary stance, AMD's businesses should benefit. AMD's gaming segment could see a sharp recovery from its lows as consumer sentiment improves and gaming sales increase. Moreover, AMD should see a broad sales recovery amongst all segments this year, and the growth should persist in future years as the company advances.

Future Sales And Earnings Likely to Surprise Higher

Due to AMD's advancing position in the AI segment powered by its new MI 300 series GPUs, we could see considerable sales and profitability growth in future quarters and years.

Sales Likely To Surge From Here

Sales estimates

Sales estimates (SeekingAlpha.com )

This year's consensus revenue estimate is about $26.5 billion, roughly a 17% increase over last year. However, due to a robust recovery and more than anticipated robust demand for its AI chips, AMD could report better-than-expected revenues of $28-$30 billion this year. Also, we should see a considerable 17-20% revenue growth in future years as significant AI demand and expansion should provide a long growth runway for AMD.

Significant EPS Recovery Likely

AMD EPS

AMD EPS (TradingEconomics.com )

Like with revenues, we saw a transitory dip in AMD's EPS due to the slowdown process, high interest rates, and other temporary variables. However, profitability should follow now that we will likely see substantial sales growth gains in future quarters and years. Last year, AMD delivered $1.88 in EPS in the first three quarters, and the consensus estimate is about $0.77 for Q4. Therefore, AMD should provide around $2.65 in EPS for 2023. This dynamic represents a 25% decline from the $3.54 AMD delivered in 2022.

The bullish case scenario: AMD could put up a big beat for Q4 as its AI sales could be taking off by now. Instead of the 77 cents, we could see 85 cents or better. This dynamic should lead to EPS upgrades in future quarters, enabling AMD's stock price to rise considerably following the report.

In fact, we should see solid EPS growth from here, and AMD could outperform consensus estimates. The consensus 2024 EPS estimate is $3.75, which would be a record high for AMD and a 42% YoY increase. However, higher-end estimates go up to $5 this year, and AMD could post an EPS of $4.50 for 2024. $4.50 in EPS implies AMD is trading at 33 times this year's earnings estimates.

Also, we should see healthy EPS growth next year, implying AMD could deliver EPS of $5.50-$6.50 in 2025. $6 in EPS indicates AMD could be trading around 25 times forward EPS estimates, which is relatively inexpensive for a company in AMD's advantageous high growth position. Moreover, AMD's P/E multiple may climb into the 30s as it demonstrates improved revenue and EPS growth in future quarters.

Risks to AMD

Despite the substantial potential, AMD faces several risks. AMD has powerful competitors and needs to stay on its A-game to compete with the highest-quality chip developers and manufacturers globally. Also, AMD needs to consider costs and improve profitability. There is also the macroeconomic dynamic and a possible slowdown on the horizon. The Fed could also complicate things by not lowering rates fast enough, and there are other risks with investing in AMD. Investors should examine these and other risks before committing to an AMD investment.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

The 39 analysts offering 12-month price forecasts for Advanced Micro Devices Inc have a median target of 154.00, with a high estimate of 205.00 and a low estimate of 100.00. The median estimate represents a -11.60% decrease from the last price of 174.21.

Resource:

https://seekingalpha.com/article/4662217-amd-prepare-for-the-ai-boom

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