Summary
Advanced Micro Devices, Inc. is growing fast and trades below fair value. Reported strong results on Tuesday afternoon.
The company did especially well in the data center market.
Its Q4 earnings are growing fast while the valuation is low.
nantonov
Article Thesis
Advanced Micro Devices, Inc. (NASDAQ:AMD) (NEOE:AMD:CA) reported positive Q4 results on Tuesday afternoon -- and yet, the stock fell in after-hours trading. Considering the steep share price decline over the last year that has made AMD a lot cheaper, I believe that Advanced Micro Devices has now become a quite attractive investment.
Past Coverage
I have written about AMD in the past, but not recently. My most recent article is from 2023, with that and previous AMD articles being available here. The company has now released its highly anticipated Q4 results. Due to the share price pull-back we have seen recently, AMD stock now looks pretty inexpensive again -- which is why I want to update my views on the company.
What Happened?
Based on the share price action in Tuesday's after-hours trading, one could assume that AMD must have missed the analyst consensus estimates with its Q4 report. After all, shares are down 5% at the time of writing. But that is not true at all, as the following screencap shows:
AMD Q4 results (Seeking Alpha)
AMD did not deliver a double beat, which would have been ideal, but it still delivered quite positive results. Earnings per share were as high as expected, with revenue coming in a little more than 2% above the Wall Street analyst consensus estimate. Based on these results, the after-hours share price drop does not seem justified to me, especially when we consider that AMD has underperformed the market considerably over the last year. Thus, the company wasn't priced for perfection at all. Let's delve into the numbers:
AMD: Good Operating Performance
Advanced Micro Devices is one of the larger chip companies in the world, although considerably smaller than its main competitor NVIDIA (NVDA), both in terms of revenue and profit generation, and when it comes to market capitalization. That being said, AMD generates substantial revenue and profit, nevertheless. With almost $8 billion in revenue during the most recent quarter, AMD saw its sales expand by almost one quarter, relative to one year earlier. That is not an Nvidia-level growth rate, but compelling for sure -- and relative to its other key competitor, Intel (INTC), AMD performed extremely well, as Intel showed a 7% revenue decline for its most recent quarter.
AMD's different business units did perform very differently, which is not surprising, as the end markets the company addresses are showing different levels of growth (or lack thereof). The hottest market in the chip space is, of course, the data center market, especially when it comes to AI-focused data center chips. Here, Nvidia is king, but AMD is performing well, too. AMD recorded a growth rate of 69% in its data center business unit, which was the best relative performance of all of AMD's different units. AMD's data center unit recorded revenues of $3.9 billion, around half of the company-wide revenue number.
When the biggest unit is growing at an above-average pace, that is good news. The importance of that unit will continue to grow over time -- and eventually, the company-wide growth rate will get lifted higher as well, assuming the fast-growing business unit (data centers in this case) can maintain its above-average growth rate.
Due to the heavy investments by all kinds of companies in AI capacity, with the hyperscalers such as Microsoft (MSFT) and Alphabet (GOOG)(GOOGL) being especially noteworthy for their massive AI data center spending, it seems highly likely to me that the market growth rate for data center chips will remain high in 2025. AMD should be well-positioned to benefit from that growth. With its EPYC CPUs and its INSTINCT GPUs, AMD has an attractive portfolio, especially for customers that put a lot of value on power efficiency -- one of AMD's strong points. For customers in areas with high energy costs, the efficiency of AMD's chips should remain a major selling point. With the El Capitan system, AMD's CPUs and GPUs currently power the best-performing supercomputer in the world, and according to AMD's earnings release, the company is working on many additional supercomputer projects, including in the US, Germany, and Norway.
While AMD's performance in the data center space was admirable, other units didn't fare this well, however. In the client computing space, AMD generated strong revenue growth of 58%, only slightly less than the data center growth rate, but the gaming business declined by a hefty 59% versus one year ago. This was a major drag on AMD's company-wide revenue growth rate.
The good news is that the unit is now considerably smaller than it was one year ago, thus even if the unit were to shrink over the next year, too, the impact, in absolute terms, wouldn't be as large. Also, it is possible that AMD will revert course in the gaming market: AMD showcased new gaming chips at CES earlier this year, such as the Ryzen 9000X3D, which will hopefully help improve the revenue performance of the gaming unit going forward.
Revenue growth is good, of course, but ultimately, investors want to see profit and cash flow. It is thus highly important how a company's margins are developing over time. Here, AMD did pretty well -- its gross margin rose by a nice 400 base points, hitting 51% on a GAAP basis and 54% on a non-GAAP basis.
Between an impressive revenue growth rate of 24% and some gross margin growth, AMD generated highly attractive gross profit growth. Add some operating leverage -- operating expenses, e.g., for administration and R&D, grew less than its gross profit -- and AMD managed to hit an operating income growth rate of 43% during the most recent quarter. That's not as much as what Nvidia has managed to do in recent quarters, but still very strong. Net income and earnings per share were up by 42% each.
Relative to the first three quarters of 2024, that was an improvement: Earnings per share rose by 26% in all of 2024, and revenue rose by 14%. With growth accelerating towards the end of the year, momentum is on AMD's side -- and based on the company's guidance for Q1, momentum remains strong. AMD expects revenue growth of around 30% in Q1, relative to one year earlier, which means further acceleration compared to the 24% revenue increase in Q4.
All in all, there were many things to like in AMD's report. Revenues performed well, especially in the data center space, revenue growth is accelerating, margins are expanding, and AMD benefits from operating leverage. The weak gaming performance was unfortunate, but is more than balanced out by the strong performance elsewhere. Based on these results, a share price decline does not seem justified at all -- and based on these results, AMD looks quite attractive to me.
AMD: The Price Is Right
Last year, AMD traded for as much as $210 per share -- based on its results at the time, that was not justified. It also wouldn't be justified based on its current results. But at the after-hours price of $113 per share, AMD looks quite attractive: The company is forecasted to earn $4.93 per share in 2025, which translates into an earnings multiple of 22.9. While a ~23x earnings multiple is not necessarily low in absolute terms, it seems quite low for a company that is forecasting a revenue increase of 30% for the current quarter and that has delivered earnings per share growth north of 40% for the most recent quarter. From a growth-to-valuation perspective, AMD seems quite attractive to me right here, with shares now trading at a 52-week low despite ongoing operational success.
AMD isn't risk-free, of course. The company would be exposed to an escalating Taiwan conflict due to its reliance on Taiwan Semiconductor Manufacturing Company (TSM). Some of its business units are consumer-dependent (especially gaming), and there is some technological risk -- theoretically, competitors could move ahead of AMD with new products. But none of these risks seem particularly worrisome to me, and considering the exposure to one of the biggest growth markets in the world -- data centers -- and the undemanding valuation, I consider AMD a “Buy” right here. The market's after-hours reaction seems entirely unjustified to me -- just like the run-up in AMD's share price to more than $200 around one year ago when investors were unreasonably bullish.
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