US Export Restrictions And Manufacturing Bottlenecks Will Undermine Future Prospects

Key Takeaways

• Escalating export restrictions and geopolitical tensions threaten AMD's access to crucial markets and could increase compliance costs, limiting long-term revenue and earnings growth.
  
• Heavy dependence on third-party manufacturing, rising R&D costs, and growing competition from in-house chip development risk compressing margins and undermining optimistic growth projections.
  
• Accelerating AI adoption and cloud growth are driving AMD's strong revenue, expanding market share, improving margins, and positioning the company for sustained long-term earnings growth.

Catalysts

Operates as a semiconductor company worldwide.

• Although demand for AI hardware appears robust, ongoing and potentially intensifying US export restrictions, particularly on MI308 and future generations, threaten to permanently limit AMD's access to the Chinese AI market and could disrupt global supply chains, reducing the long-term revenue growth that is currently priced into the stock.
  
• Despite strong adoption of AMD's high-end processors in cloud and data centers, rising geopolitical tensions and regulatory barriers could increasingly fragment global computing markets, causing incremental compliance costs and limiting the total addressable market, thus exerting sustained downward pressure on top-line expansion and earnings over the next several years.
  
• While gross margin is being sustained through product mix and operational efficiency, AMD's heavy reliance on third-party foundries like TSMC, combined with the escalating costs and complexity of advanced manufacturing at leading edge process nodes, exposes the company to manufacturing bottlenecks and unpredictable price increases, which could significantly erode net margins as industry-wide capacity constraints worsen.
  
• The exponential investments required to compete in next-generation AI chip development and the need to rapidly scale system-level capabilities (such as the Helios rack) may outpace revenue growth in the mid-term, driving R&D and operational expenses higher and compressing free cash flow, especially if major customer deployments are delayed or do not materialize at projected scale.
  
• The growing trend of large hyperscalers and major technology companies accelerating in-house chip development threatens to commoditize portions of AMD's portfolio and reduce its bargaining power, increasing price competition and lowering ASPs, ultimately jeopardizing the revenue and margin expansion assumed by the current stock valuation.

Advanced Micro Devices Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Advanced Micro Devices compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Advanced Micro Devices's revenue will grow by 14.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.2% today to 15.9% in 3 years time.
• The bearish analysts expect earnings to reach $7.0 billion (and earnings per share of $3.84) by about August 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.8x on those 2028 earnings, down from 102.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.17%, as per the Simply Wall St company report.

Advanced Micro Devices Future Earnings Per Share Growth

Risks

• The proliferation of AI across industries and accelerated cloud adoption is driving strong, broad-based demand for AMD's high-performance CPUs and GPUs, which is resulting in record revenues, ongoing share gains, and positions the company for secular revenue and earnings growth over the coming years.
  
• AMD's expanding presence in the data center segment, especially with EPYC server CPUs and Instinct AI accelerators, is leading to higher-margin revenue and repeated records in both cloud and enterprise CPU sales, suggesting that gross margins and overall profitability may continue to improve as this premium product mix grows.
  
• Ongoing investments in chiplet and advanced packaging technology, together with a deepening ecosystem and developer community through AI software stack upgrades, are enhancing product performance and driving operational efficiencies, which could translate to sustained gross margin expansion and improved net margins.
  
• Strategic partnerships and design wins with major hyperscalers, large OEMs, and sovereign governments are resulting in recurring, high-volume contracts and expanding the addressable markets for AMD, thereby providing long-term revenue stability and the potential for operating leverage.
  
• The rapid ramp and faster-than-expected customer adoption of the MI350 and anticipated strong demand for the next-generation MI400 series, including Helios rack-scale AI platforms, ensure AMD is well positioned to capture a significant share of the tens of billions of dollars in annual AI-related revenue, supporting future top-line growth and robust earnings expansion.

Valuation

• The assumed bearish price target for Advanced Micro Devices is $131.06, which represents two standard deviations below the consensus price target of $182.53. This valuation is based on what can be assumed as the expectations of Advanced Micro Devices's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $230.0, and the most bearish reporting a price target of just $125.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $44.1 billion, earnings will come to $7.0 billion, and it would be trading on a PE ratio of 40.8x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of $172.76, the bearish analyst price target of $131.06 is 31.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.