Although NVIDIA (NASDAQ: NVDA) has so far captured the majority of the market share in the AI industry, this industry is rapidly expanding and many other companies are also participating. AMD (NASDAQ stock code: AMD) is one of them, not only developing a series of data center chips to compete with NVIDIA but also taking an early leading position in another crucial AI field. #AI trend# #2024 investment strategy#
The Wall Street Journal tracked coverage of AMD stock by 49 analysts, most of whom gave the highest possible buy rating. Here is why investors may want to follow Wall Street's opinion.
AMD is currently focused on the field of artificial intelligence.
AMD has been producing some of the world's most coveted consumer electronics product chips. Its processors are widely used in Sony's PlayStation 5 and Microsoft's Xbox Series X. AMD also powers the information and entertainment systems for Tesla's electric cars. Innovation is at the core of AMD, so it is no surprise that the company is turning its attention to artificial intelligence.
On the consumer side, AMD believes that AI is the most important turning point in personal computing since the Internet. The company has developed a range of AI central processing units (CPUs), graphics processing units (GPUs), and neural processing units (NPUs) under its Ryzen brand. Customers such as Dell and HP have already shipped millions of computers with these chips. In fact, AMD estimates that it has a 90% market share in this new market.
Generative AI applications like ChatGPT can quickly generate text, images, videos, and computer code, but they require a lot of computing power, so workloads typically bounce back and forth between data centers and end users. AI chips will allow more of these workloads to be processed on computers and devices, creating faster (and more private) user experiences.
On the data center side, AMD launched its MI300 series chips last year. The MI300X, like NVIDIA's industry-leading product H100, is a pure GPU, while the MI300A combines CPU and GPU hardware to create an Accelerated Processing Unit (APU). Lisa Su, CEO of AMD, said that over 100 enterprises and AI customers have deployed MI300X GPUs, including important NVIDIA customers such as Microsoft and Oracle.
On the other hand, Lawrence Livermore National Laboratory chose MI300A to power its new El Capitan supercomputer, which will be used to advance progress in fields ranging from fusion energy to high-density physics to national security.
AMD's AI revenue soared.
MI300 is AMD's fastest-growing product in history, achieving $1 billion in revenue within just six months of its launch. It helped drive record data center revenue of $2.3 billion in the first quarter of 2024 ended March 31, up 80% year on year.
Su said that she now expects sales of just the MI300 series to exceed $4 billion in 2024, up from her original forecast of $3.5 billion in January.
On the other hand, Ryzen AI chips drove revenue for AMD's client department to $1.4 billion in the first quarter, up 85% year-on-year. This momentum should continue as the company has just released Ryzen AI 300 series processors, which come with the world's most powerful NPU designed for next-generation AI personal computers. They will power Microsoft's new Copilot+ computers, which are designed specifically to provide AI experiences to consumers.
Despite strong contributions from AMD's AI chips, the company's overall Q1 revenue was $5.5 billion, up just 2% year on year. This was partly due to a slowdown in gaming sector sales, as demand for PlayStation 5 and Xbox Series X wanes. Revenue from AMD's embedded division also declined, which includes Xilinx's adaptive computing unit, which the company recently acquired. The business is expected to improve in the second half of the year.
Wall Street is bullish on AMD stock.
The Wall Street Journal tracked coverage of AMD stock by 49 analysts, 35 of whom gave the highest possible buy rating. Another 4 were in the overweight (call) camp and 10 recommended holding. No analysts recommended selling.
Although this is a mostly bullish consensus, there is one warning: Based on AMD's non-GAAP earnings per share of $2.67 for the past 12 months and its current stock price, its price-to-earnings ratio (P/E) is 59.7. This makes AMD almost twice as expensive as the Nasdaq 100 technology index, which has a P/E ratio of 31.7.
This also means that AMD's stock is close to NVIDIA's P/E ratio of 74.2, but NVIDIA provides triple-digit percentage growth in revenue and profit to support its premium valuation. From this perspective, it is difficult to prove that AMD's current stock price is reasonable.
However, Wall Street predicts that AMD will achieve earnings of $3.51 in 2024, which will bring its forward P/E ratio down to a more reasonable level of 45.5. By 2025, analysts believe that AMD may achieve earnings of $5.59, reducing its forward P/E ratio to just 28.5.
In other words, no matter how far investors are willing to look into the future, AMD's stock looks much cheaper. If they can hold the stock for at least two years, they may perform very well, as it looks much cheaper in effect than today's Nasdaq 100 trade. In addition, by then, AMD should reap rich rewards from its efforts in the AI field.