MI350 Series And EPYC Will Transform Data Center AI

Key Takeaways

• AMD's AI data center growth is driven by new product introductions, strong market position, and strategic acquisitions, supporting long-term revenue and earnings.
  
• Expanding market share in CPUs and AI advances enhances AMD's revenue prospects, boosting client segment growth and operational efficiency.
  
• Increased competition in server CPUs and challenges in gaming, embedded, and client segments pose risks to AMD's growth and revenue stability.

Catalysts

Operates as a semiconductor company worldwide.

• AMD's data center AI business is poised for significant growth, with the introduction of the MI350 series expected to boost their competitive position and drive revenue from tens of billions annually due to accelerated demand for AI compute solutions.
  
• The company has achieved over 50% market share with major hyperscalers for its EPYC CPUs, indicating strong market acceptance and setting the stage for continued revenue growth in the server business segment.
  
• With a robust portfolio of client CPUs, including the latest Ryzen series, AMD anticipates client segment revenue to outpace market growth in 2025, contributing positively to both revenue and net margins through increased market share and sales.
  
• AMD's advancements in AI software, particularly in their ROCm stack, provide a strategic advantage in offering comprehensive solutions for AI workloads, which will likely impact earnings positively as adoption increases across various market segments.
  
• The ongoing success and expected completion of the ZT Systems acquisition will enhance AMD's ability to bring new Instinct accelerator platforms to market more quickly, which should contribute to improved operational efficiency and performance, ultimately benefiting net margins and earnings growth.

Advanced Micro Devices Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Advanced Micro Devices compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Advanced Micro Devices's revenue will grow by 24.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.4% today to 22.5% in 3 years time.
• The bullish analysts expect earnings to reach $11.3 billion (and earnings per share of $6.92) by about April 2028, up from $1.6 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 bullish analyst cohort, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, down from 82.4x today. This future PE is greater than the current PE for the US Semiconductor industry at 20.5x.
• 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 8.88%, as per the Simply Wall St company report.

Advanced Micro Devices Future Earnings Per Share Growth

Risks

• AMD faces potential risks from increased competition in the server CPU market, where pricing pressures and aggressive strategies by competitors can impact AMD's revenue growth and margins.
  
• The gaming segment experienced a significant decline in revenue and operating income, which if persisted, could impact AMD's overall revenue and earnings growth trajectory.
  
• The embedded segment is witnessing mixed demand and a slower-than-expected market recovery, posing risks to AMD's revenue and operating margin within this segment.
  
• There are concerns about potential inventory buildup if AMD's client segment growth exceeds actual end-market demand, which might negatively impact AMD's future revenue and earnings.
  
• AMD's reliance on continued growth in the Data Center and AI segments introduces execution risks, as any delays or setbacks in product launches or customer deployments can affect revenue stability and earnings growth.

Valuation

• The assumed bullish price target for Advanced Micro Devices is $173.22, which represents one standard deviation above the consensus price target of $145.99. 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 bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $50.2 billion, earnings will come to $11.3 billion, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $83.62, the bullish analyst price target of $173.22 is 51.7% 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.