Whereas AI chief Nvidia (NASDAQ:NVDA) reported stellar Q1 earnings, pc processor and graphics card maker Superior Micro Units (NASDAQ:AMD) comparatively underperformed, solely assembly expectations. This led to a decline within the inventory value, post-earnings. Nevertheless, traders should notice that NVDA is a couple of quarters forward of AMD. AMD is showcasing spectacular development in its AI-driven Knowledge Heart revenues, which is able to in the end move into margins and earnings. Due to this fact, I’m bullish on AMD inventory.
AMD’s Muted Q1 Earnings Did not Impress Traders
On April 30, AMD reported Q1 EPS of $0.62, according to analysts’ estimates. The determine got here in a mere 3.33% increased than the Q1FY23 determine of $0.60 per share. Q1 revenues grew 2.2% year-over-year to $5.47 billion, additionally roughly according to consensus estimates. Strong Knowledge Heart section revenues considerably offset the weak point within the Embedded and Gaming segments, however the total Q1 outcomes had been lackluster.
Crucially, Knowledge Heart income development continued to impress, rising a powerful 80% year-over-year through the quarter, pushed by the launch of its newest MI300 AI accelerators, Ryzen, and EPYC processors. Disappointingly, nonetheless, Gaming income fell 48% year-over-year on account of a decline in gaming chip gross sales. Additional, adjusted gross and working margins had been uninspiring, standing at 52% (78.4% for Nvidia) and 21%, respectively.
Subsequent, AMD’s income steering met avenue expectations. For Q2, complete income is predicted to be round $5.7 billion (+/- $300 million). Positively, nonetheless, administration raised the outlook for information heart GPU gross sales, which at the moment are anticipated to return in at $4 billion versus $3.5 billion guided earlier. The agency’s adjusted gross margin is forecast to be roughly 53%.
AMD’s AI Product Roadmap Presents Sturdy Development Potential
A comparatively underwhelming Q1 print and fears of AI demand waning have led to a 28% decline in AMD’s inventory from its all-time excessive of $227 in March 2024 to round $164 at the moment.
Nevertheless, traders ought to notice that AMD is the closest competitor to NVDA. It’s well-known that AMD’s GPUs are a less expensive different to NVDA’s GPUs. Given the clear hole between demand and provide on account of restricted manufacturing capability, the surge within the recognition of AI creates a chance for AMD chips to fill within the hole.
As an example, Microsoft (NASDAQ:MSFT) just lately introduced that its cloud computing clients utilizing Azure can go for AMD’s MI300 chips together with NVDA’s H100 GPUs. This may give clients an alternate in case of total provide constraints or purchasers’ particular person budgetary constraints. Notably, AMD’s MI300 accelerator, which competes with NVDA’s H100 chips, prices 33% much less.
Whereas Nvidia is at the moment main within the AI and GPU markets with over 80% market share, AMD’s aggressive pricing and efficiency enhancements might assist it acquire market share over time. It’s value noting that MI300 is reckoned because the fastest-ramping product within the historical past of AMD. Launched simply two quarters in the past, it has already crossed the $1 billion gross sales milestone.
It’s no surprise, then, that AMD’s administration has been persistently growing the outlook for MI300 gross sales for the previous three quarters. There’s a robust probability that the gross sales improve pattern will proceed for the upcoming quarters as properly.
It’s vital to notice that AMD has a greater variety of choices in comparison with NVDA. Whereas NVDA is well-known for its highly effective GPUs for information facilities, AMD caters to a wider vary that features CPUs for PCs and GPUs for the gaming trade. Throughout COVID-19, the PC market noticed roaring demand. Now, it’s time once more for customers to maneuver to new PCs with upgraded know-how. AMD is a key provider to the high-end PC market and is certain to profit from the uptick in demand for PCs.
Additional, each NVDA and AMD proceed to unveil their latest merchandise, together with accelerators and processors. Whereas AMD launched its MI300 accelerators in December 2023, NVDA launched its Blackwell GPUs in March 2024.
In response to NVDA’s tempo of innovation, AMD’s CEO Lisa Su additionally introduced an annual cadence of recent product launches at the Computex present held on June 2. The product roadmap appeared spectacular with newer launches year-on-year anticipated to incrementally add to revenues and earnings.
Notably, AMD has persistently undertaken acquisitions to boost its information heart choices. As an example, it acquired Xilinx in February 2022 and Pensando Methods in Could 2022. Furthermore, the acquisitions haven’t but been built-in to their full potential and are anticipated to yield a $10 billion cross-selling alternative, as cited by administration. With its acquisitions, its complete addressable market continues to develop, having elevated to $300 billion at the moment from just below $80 billion in FY2020.
AMD’s Valuation Is Not Low-cost however Nonetheless Seems Cheap
Surprisingly, AMD is buying and selling at a excessive ahead P/E a number of (47x), barely increased than the AI prodigy Nvidia, which is buying and selling at a ahead P/E of 45x. What might be the rationale for AMD’s excessive valuation regardless of lagging behind NVDA’s inspiring outcomes? The reply is evident: AMD will probably observe in NVDA’s footsteps within the subsequent few years, as its AI development story is simply starting.
Now, let’s think about whether or not it’s value shopping for AMD at present ranges. Wall Road analysts anticipate AMD’s EPS to be roughly $5.59 in FY2025 (with expectations of round $6.50 in FY2026). If AMD retains the identical ahead P/E a number of of 47x by then, its share value might be about $275, or 68% increased than the present value.
Placing it in a different way, AMD shares are buying and selling at a P/E of 28x its FY2025 EPS estimate, implying a 35% low cost to its five-year historic common of 43x.
Due to this fact, it is smart to contemplate shopping for AMD inventory at present ranges, given the robust development fundamentals within the AI house.
Is Superior Micro Units Inventory a Purchase, In accordance with Analysts?
The sentiment amongst Wall Road analysts is decidedly optimistic relating to Superior Micro Units inventory. The inventory boasts a Sturdy Purchase consensus ranking, with 28 Purchase suggestions and 7 Holds. AMD inventory’s common value goal of $191.03 implies 16.6% upside potential from present ranges.
Conclusion: Contemplate AMD for the Lengthy-Time period AI Potential
There’s a clear-cut demand for AI throughout a broad vary of industries as firms look to construct their very own information heart infrastructure. This suggests that robust development in gross sales for AI chips, GPUs, and CPUs will proceed for at the least some years. AMD’s developments in AI and information heart options place the corporate properly for future development, and its aggressive pricing will assist it acquire market share over time.
Moreover, AMD has a robust foothold within the AI marketplace for PCs and can probably proceed to win market share. The approaching PC improve cycle with AI-enabled PCs will add to gross sales and margin development for AMD within the coming quarters. Given my bullish stance, I view the present share value weak point as a shopping for alternative.
