MI350 Series And EPYC Processors Will Drive AI Success

Key Takeaways

• The MI350 series launch and strategic partnerships are expected to drive growth in data center and commercial PC revenues despite inventory challenges.
  
• Investments in AI innovation and server CPU market gains may foster growth, but pricing pressures and increased investments could impact near-term margins.
  
• Over-reliance on Data Center revenue and heavy R&D expenses pose risks, while declines in Gaming and Embedded segments challenge AMD's revenue stability.

Catalysts

Operates as a semiconductor company worldwide.

• The anticipated launch of AMD's MI350 series, featuring an improved architecture and significant performance enhancements, is expected to drive robust growth in Data Center revenue by offering competitive advantages in AI compute performance and scalability.
  
• AMD's strong position in the server CPU market, with continued share gains led by its EPYC processors, supports the prospect of moderate revenue growth as increased competition and potential pricing pressures may limit margin expansion.
  
• The strategic collaboration with key partners like Dell to expand the Ryzen processor portfolio in commercial PCs may bolster AMD's Client segment revenue, although the effect of inventory challenges could temper margin improvements.
  
• AMD's initiative to accelerate AI innovation and infrastructure, exemplified by significant advancements and partnerships with hyperscalers, is anticipated to foster growth in Data Center AI revenues but may require increased investments impacting near-term earnings.
  
• AMD's cautious outlook in the embedded segment, driven by mixed market demand, could signal a conservative projection for revenue contributions, with ongoing product innovation efforts potentially enhancing future financial performance.

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 10.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.4% today to 15.2% in 3 years time.
• The bearish analysts expect earnings to reach $5.3 billion (and earnings per share of $3.46) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 45.4x on those 2028 earnings, down from 87.0x today. This future PE is greater than the current PE for the US Semiconductor industry at 23.2x.
• 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 8.91%, as per the Simply Wall St company report.

Advanced Micro Devices Future Earnings Per Share Growth

Risks

• The significant reliance on the Data Center segment, which represents 50% of annual revenue, poses a risk as any downturn in demand or competition in this area could heavily impact AMD's revenue and profitability.
  
• The Gaming segment experienced a 59% decline year-over-year, which could signal decreasing demand or increased competition, negatively affecting overall revenue and margins.
  
• Despite strong Data Center performance, the Embedded segment faces a mixed demand environment with a 13% revenue decrease, indicating potential long-term challenges in these markets, affecting AMD's revenue stability.
  
• Heavy investments in R&D and marketing are increasing operating expenses by 23% year-over-year, which could pressure net margins if revenue growth does not outpace these expenses.
  
• While the company anticipates significant growth in AI, the competitive landscape with internal cloud customer chip development and other AI solutions could constrain AMD’s ability to capture sufficient market share, impacting future revenue growth expectations in this segment.

Valuation

• The assumed bearish price target for Advanced Micro Devices is $113.3, which represents one standard deviation below the consensus price target of $141.93. 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 $225.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $34.5 billion, earnings will come to $5.3 billion, and it would be trading on a PE ratio of 45.4x, assuming you use a discount rate of 8.9%.
• Given the current share price of $88.29, the bearish analyst price target of $113.3 is 22.1% 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.