Instinct Accelerators And ROCm Updates Will Advance Data Center AI Offerings

Key Takeaways

• Expansion in Data Center AI with Instinct accelerators and ROCm could drive significant revenue growth and impact margins positively.
  
• Strategic new technology launches and partnerships, including EPYC processors and Radeon GPUs, position AMD for potential growth in AI, server, and gaming markets.
  
• Reliance on the Data Center segment and competitive pressures in server CPUs pose risks to AMD's revenue growth and net margins.

Catalysts

Operates as a semiconductor company worldwide.

• AMD's establishment and expansion of their Data Center AI franchise, including the planned launches of advanced Instinct accelerators and enhancements in their ROCm software suite, are expected to drive significant future growth in Data Center AI revenue, potentially impacting revenue positively.
  
• The acceleration of the EPYC CPU product line, particularly with the Turin processors, and increasing adoption by hyperscale cloud providers and enterprise customers, suggest continued growth in AMD's server business, which could contribute to higher revenue and potential net margin improvement.
  
• The planned launch and adoption of new Radeon GPUs with advanced features like better ray tracing and AI-powered upscaling technology are designed to capture a larger share of the gaming market, potentially boosting revenue within their Gaming segment as market conditions normalize.
  
• AMD's strategic collaborations, such as the one with Dell to offer Ryzen Pro processors across a full portfolio of commercial PCs and expected PC industry growth, position AMD to potentially outpace the market in client revenue growth, impacting overall revenue and margins positively.
  
• AMD's continued investment in and expansion of AI-specific software and hardware technologies, along with growing demand for high-performance computing solutions, sets a trajectory for capturing more of the rapidly expanding AI market, potentially leading to significant revenue and EPS growth in the longer term.

Advanced Micro Devices Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Advanced Micro Devices's revenue will grow by 19.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $9.3 billion (and earnings per share of $5.17) by about March 2028, up from $1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $11.3 billion in earnings, and the most bearish expecting $5.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, down from 99.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

Advanced Micro Devices Future Earnings Per Share Growth

Risks

• The Gaming segment revenue declined significantly by 59% year-over-year, primarily due to decreased semi-custom sales as Microsoft and Sony focused on reducing channel inventory, which could impact AMD's future revenue in this business.
  
• The Embedded segment experienced a 13% revenue decline year-over-year, with market demand recovering slower than expected, potentially affecting revenue growth in this segment.
  
• Inventory increased sequentially by $360 million, indicating potential overproduction or slower sales, which could negatively impact net margins if the inventory is not cleared efficiently.
  
• Despite strong Data Center revenue growth, AMD's reliance on this segment for approximately 50% of annual revenue may present a risk if there is a downturn in demand or increased competition, potentially affecting earnings.
  
• Competitive pressures in the server CPU market and potential aggressive pricing strategies by competitors could impact AMD's revenue growth and net margins in this critical area.

Valuation

• The analysts have a consensus price target of $148.335 for Advanced Micro Devices based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $225.0, and the most bearish reporting a price target of just $90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $44.1 billion, earnings will come to $9.3 billion, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $100.31, the analyst price target of $148.34 is 32.4% higher.
  
• 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.