The stock is up 123% in the past 12 months. Advanced Micro Devices (NASDAQ: AMD) have received great benefits from artificial intelligence (AI) Trend.But unlike its rivals Nvidia, Although sales and profits are surging, AMD's rise relies more on future expectations than current performance. Let's discuss the company's recently announced fourth quarter earnings and explore how the company's chip business is likely to evolve in the coming years.
Fourth quarter profits weren't great
AMD's fourth quarter earnings report was mixed. Total revenue rose 10% year-over-year to $6.17 billion, with the data center division performing well with a 38% increase. The company recently released the latest version of AMD Instinct. graphics processing unit (GPU) Designed for training and running AI applications. And it is believed that these products contributed to the healthy expansion during this period.
That said, AMD doesn't just sell data center chips. Other segments such as gaming and embedded hardware declined by 17% and 24%, respectively, resulting in lackluster results overall. There are also many expectations regarding the company's future guidelines.
Management expects first-quarter sales of $5.4 billion, well below the $5.73 billion expected by analysts. But most worryingly, the company expects data center revenue to be flat as lower central processing unit (CPU) sales offset growth in new AI GPUs. CEO Lisa Su expects data center GPUs to add $3.5 billion to AMD's revenue for the full year of 2024. However, this doesn't mean much if the company's other segments continue to decline by the same amount or more.
AMD's claims hang over the next three years
Currently, AMD's bullish theory is based on Lisa Su's prediction that the AI chip market could rise to $400 billion by 2027. If AMD can seize just 5% of that opportunity, it could increase its revenue by as much as $20 billion in just three years. – Probably enough to overcome possible weaknesses in other businesses.The company has already secured significant funding cloud customer like microsoft, oracleand meta, Power both internal and external workloads with Instinct GPUs.
To increase market share, AMD needs to make its chips competitive. Nvidia's Flagship H100. And we can achieve this by focusing on performance and price.
The Financial Times estimates the price of the Nvidia H100 at $40,000. Additionally, Nvidia's gross profit margin rose from 54% to 74% in the third quarter, suggesting it is taking advantage of the lack of alternatives to raising prices. The market appears ripe for lower cost options.
But the story (and quote) is cheap. Over the next few years, AMD should take advantage of this opportunity to grow its AI chip business. And so far, no concrete results have been shown to justify the rise in stock prices.
Pricing for perfection
The AI industry is expected to expand significantly over the next three years, and AMD is well-positioned to take advantage of this growth. But that doesn't mean the stock is worth its hefty price tag.
With forward Price earnings ratio (PER) AMD's valuation is higher than Nvidia's, which has a forward P/E of 30. This means AMD has little margin for error, and the next three years will be a make-or-break period for the company. The stock remains a buy, but more cautious investors may want to wait for more quarterly data before taking a position.
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Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Will Ebifang has no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.
Is AMD stock still a buy in February?Originally published by The Motley Fool
