Friday, February 23, 2024
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Riding the AI Wave: Why AMD Stock Is Primed for Explosive Growth

Any Advanced Micro Devices (NASDAQ:AMD) stock forecast will have to include the fact that fourth quarter 2023 financial results showed the company remains a leader in AI. AMD stock continues to rip higher, fueled by the company’s expanding role when it comes to the design of microchips and semiconductors that are powering the AI revolution.

So far in 2024, AMD stock has risen 28%, bringing the company’s 12-month gain to 112%. Through five years, AMD’s share price has increased 670%, outpacing most other stocks, including in the technology space. With a new slate of microchips having just been released, the company and its stock look poised for further gains.

AMD Stock Forecast Predicts a Strong Outlook

To be fair, AMD’s share price dropped 6% after the company provided guidance for this year’s first quarter that fell short of Wall Street expectations. Along with Q4 earnings that mostly aligned with analysts’ forecasts, the company issued soft guidance for this year’s first quarter.

Advanced Micro Devices reported earnings per share (EPS) of 77 cents, which matched analyst expectations. Revenue for Q4 2023 totaled $6.17 billion versus $6.12 billion that was forecast on Wall Street.

For the current first quarter of 2024, AMD said that it expects $5.4 billion in sales, plus or minus $300 million. That outlook fell short of the $5.73 billion of revenue that analysts had been looking for, sending the stock down.

However, AMD raised its full-year outlook for sales of its AI chips, saying it expects $3.5 billion of AI chip sales this year, up from a $2 billion forecast last fall. The increased guidance for AI chips is what investors focused on, helping AMD stock to quickly recover after the post-earnings drop.

Several analysts quickly raised their targets after the Q4 print and forward guidance as the prevailing AMD stock forecast showed a path to growth.

Goldman Sachs (NYSE:GS) raised its price target on AMD stock to $180 from $157 and kept a “buy” rating on the shares. Jefferies Financial Group (NYSE:JEF) lifted its price target on the company’s stock to $200 from $130 and also kept a “buy” rating. In the end, the Q4 2023 results were decent, and the increased outlook for AI chip sales stole the show.

All in on AI

Much of the optimism surrounding AMD hinges on the company’s next generation of microchips that can help power AI models and applications.

Though not yet reflected in its financial results, AMD unveiled before Christmas a new series of chips called the “Ryzen 8040” that are aimed at boosting the power and speed of AI applications by up to 60%.

The new chips will be incorporated into laptops and personal computers made by companies such as Dell Technologies (NYSE:DELL).

While excitement is building for sales of the Ryzen 8040 chips, the hype pales in comparison to the expectations surrounding AMD’s new MI300X accelerator microchip that went on sale late last year.

Used primarily in data centers and servers, the MI300X is seen as a direct competitor to archrival Nvidia’s (NASDAQ:NVDA) AI data center chips. Much of AMD’s success going forward will depend on the company’s ability to eat into Nvidia’s 70% share of the global data center chip market.

Accelerating Growth

AMD is off to a promising start, having announced that mega-cap technology companies such as Meta Platforms (NASDAQ:META) and Microsoft (NASDAQ:MSFT) have already placed orders to purchase the MI300X chip.

AMD revised up its forecast for AI chip sales this year to $3.5 billion from $2 billion, largely because of the already strong sales of the MI300X chip. And that chip has not even been included in the company’s financial results for a full quarter yet.

While it remains to be seen if AMD is taking market share from Nvidia, AMD’s data center business, which includes its AI chips, rose 38% annually in Q4 2023. It’s now the company’s biggest business unit.

AMD’s business developing chips for personal computers and servers rose 62% year-over-year in Q4 because of the new chip launches.

While AMD’s video game unit, which includes processors for the Xbox and PlayStation consoles, fell 17% in Q4, it was mostly because of slower console sales globally last year.

Buy AMD Stock

AMD has gone all in on AI and it is the engine that is driving the company’s financials and share price. It’s clearly the right growth strategy for the company and one that is boosting sales.

If AMD can succeed in chipping away at Nvidia’s stranglehold on AI chips, particularly in the data center segment, it should propel the company and its share price to new heights.

For investors looking to get exposure to the red hot AI trade, there’s no better option right now than Advanced Micro Devices. AMD stock is a buy.

On the date of publication, Joel Baglole held long positions in MSFT and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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