Hardware Efficiency And Pricing Strategies To Bolster Revenue Growth

The Latest on AMD

Data Center

• AMD reported strong third-quarter results, with revenue reaching a record $6.8 billion, an 18% increase year-over-year, primarily driven by the Data Center and Client segments.
• The Data Center segment, saw a remarkable 122% year-over-year increase in revenue to $3.5 billion. AMD can thank recent sales of its EPYC CPUs and the ramp-up of MI300X GPUs for this growth.

• AMD’s Data Center AI business is accelerating, with significant expansions in MI300X GPU adoption among major customers like Microsoft and Meta. The company raised its 2024 Data Center GPU revenue guidance to exceed $5 billion, up from the prior $4.5 billion, which was undoubtedly raised due to confidence in upcoming products like the MI325X and MI350 series GPUs, aiming to compete more effectively with Nvidia.

Client Segment Success and Market Share Gains

• The Client segment experienced a 29% year-over-year revenue increase to $1.9 billion. The recent launch of the Ryzen 7 9800X3D has been a significant success, quickly becoming a bestseller and topping the performance charts. Intel’s woes have only made this even sweeter for AMD, as AMD captured an incredible 94% of sales this week according to German retailer Mindfactory.

Challenges in the Gaming and Embedded Segments

• Things haven't been as bright in the Gaming segment, which faced a 69% year-over-year revenue decline to $462 million due to lower semi-custom and Radeon GPU sales. Good news could be around the corner though, AMD is preparing to launch its next-generation RDNA 4 architecture GPUs in early 2025, aiming to once again take the fight to Nvidia in preparation for the arrival of the RTX 5000 series.

Embedded Segments

• The Embedded segment also saw a 25% year-over-year revenue decrease to $927 million, which the company attributed to ongoing inventory normalization and softness in industrial markets. AMD is focusing on new products like the Versal AI Core adaptive SoCs to drive to try and strike the fire, though the near-term outlook remains cautious.

My Latest Thoughts

Data Center Segment

• AMD’s performance in the Data Center segment has been super encouraging. The success of the MI300X GPUs and the optimistic guidance for future GPU revenues reinforce my belief that AMD able to trade some blows with Nvidia when capitalising on the AI boom. While I recognize that some of this growth may be front-loaded, the relationships with enterprise partners that AMD has formed and the product roadmap suggest that this momentum will keep building over the next few years, provided the AI boom doesn’t run out of steam. 
• I am particularly optimistic about AMD’s strategic approach with the MI325X and the flagship MI350 series. Offering a range of products allows AMD to undercut Nvidia on price with the lower-end model, while still competing on performance with the flagship product, which could attract a broader customer base.
• Original Assumption: I originally forecasted a 15% CAGR for the Data Center segment, reaching approximately $14 billion in revenue by 2028, driven by growing demand for AI-optimized hardware.
• How’s it tracking: The most recent 122% year-over-year revenue growth absolutely blow my forecasts out of the water. I understand that growth is generally explosive out of the gates and begins to taper off as the product matures, but regardless, it seems AMD has done really well at capitalizing on the AI boom. Over the last 12 months, AMD’s data center revenue totals $11.0 Billion, which makes me think I was way too conservative. Seeing as a year has passed, I will also adjust my projections with a 2029 end date in mind. I will assume $22 Billion for Data Center revenues in 2029.

Client Segment

• The Client segment’s performance has exceeded my expectations. The strong demand for Ryzen processors, especially the flagship Ryzen 7 9800X3D has been unprecedented (and undoubtedly helped by Intel’s missing the mark with their latest releases). Intel’s recent struggles seem to be providing AMD with an opportunity to gain market share more rapidly than anticipated. The Mindfactory numbers - although not representative -  are a great insight into how well AMD’s products are resonating with consumers. Given these developments, I believe my original revenue projection of $13 billion by 2028 is not only attainable, but may need to be revised upward in the future.
• I am excited about AMD’s potential to become the dominant CPU manufacturer in the desktop market. The positive reception of the Ryzen 9000 series bodes well for AMD’s market position, and I anticipate that this momentum will continue.
• Original Assumption: Expected the Client segment revenue to grow to $13 billion by 2028, fueled by AMD’s competitive advantages and potential market share gains over Intel in desktop CPUs.
• How’s it tracking: The 29% year-over-year revenue growth is a strong indication that the Client Segment is on track to meet or even surpass my original revenue projection. If anything, I suspect AMD’s market position to get even stronger from here, considering their main competitor is struggling not just on the product font, but on the financial front too. I will once again extend my forecasts out to 2029, and will assume that the client segment will generate $15B Billion in revenue in 5 years time.

Gaming Segment

• The revenue decline in the Gaming segment is a concern. However, I view this period as a transitional phase before the launch of the RDNA 4-based GPUs in early 2025. I remain cautiously optimistic that AMD can regain ground by focusing on offering compelling performance at competitive prices, particularly in the value segment of the market. While I acknowledge that Nvidia’s lead in the high-end GPU market is substantial, AMD has an opportunity to attract consumers looking for better price-to-performance ratios.
• Original Assumption: Projected the Gaming segment to grow to $10 billion by 2028, assuming steady revenue growth driven by AMD’s strategy in the low and mid-tier gaming markets.
• How’s it tracking: The gaming segment is really underperforming expectations, but I am also acutely aware of where AMD is at during this point of the cycle. I am probably slightly more bearish on the gaming segment now than I was originally, and so I will hold my current assumption of $10 Billion in revenue, but I will now assume the company will achieve that a year later in 2029.

Embedded Segment

• The challenges in the Embedded segment are more grave than I initially thought. The decreased revenue and AMD’s apparent shift in focus toward the Data Center and Client segments suggest that the Embedded segment may become the ‘forgotten child’ and fail to achieve the growth that I previously expected.
• Original Assumption: Forecasted the Embedded segment to generate approximately $7 billion in revenue by 2028.
• Tracking: Given the 25% year-over-year revenue decrease and ongoing market softness, the segment is underperforming.  I am revising my revenue projection for this segment down to $5 billion by 2029. 

Valuation Update

• Given my updated assumptions, I’m forecasting $52 Billion in revenue for AMD, representative of 16.5% revenue growth per annum to 2029.
• I will also reduce my discount rate used from 9.7% down to 8.09%.
• I will hold my Net Profit Margin and PE assumptions as is for now.
• The impacts of the above changes will see my Fair Value rise from $182 to $194.