Advanced Micro Devices (AMD 1.72%) has been a solid performer so far this year, with gains of 50%, but shares of the chipmaker have pulled back significantly in recent months and are down 25% from the 52-week high they hit in June this year.
This recent pullback may seem a tad surprising, as AMD's second-quarter results, which were released on Aug. 1, turned out to be better than expectations. What's more, the company's guidance for the third quarter points toward a marked improvement in its financial performance following a difficult first half when its revenue and earnings fell on account of weak demand from the personal computer (PC) market and softness in the enterprise data center business.
However, analysts are upbeat about AMD's prospects for the next year. The stock carries a median 12-month price target of $145, according to a consensus of 40 analysts covering AMD. That points toward a 51% jump from current levels. But can AMD live up to Wall Street's expectations by coming out of the slump it has been in for the past three months?
AMD's growth is set to pick up
For AMD, 2023 is likely to be a story of two halves. Revenue in the first half of the year fell 14% compared to the same period in 2022. That decline is expected to slow down in the second half of the year, and AMD is expected to finish 2023 with a 9% drop in the top line, according to consensus estimates.
The company has guided for Q3 revenue of $5.7 billion, a small jump over the prior-year period's reading of $5.6 billion. Consensus analyst estimates suggest that AMD could deliver almost $6 billion in revenue in the final quarter of the year, which means that its second-half revenue could come in at $11.7 billion. So there is a chance that the company could finish 2023 with stronger-than-expected numbers. One of the reasons why that may happen is because of a big jump in the company's data center revenue in the second half of the year.
AMD delivered $6 billion in data center revenue in 2022, accounting for just over a quarter of its total revenue. The segment produced $2.6 billion in revenue in the first half of 2023. However, AMD believes that its data center revenue in 2023 could exceed 2022 levels thanks to the launch of new chips targeting artificial intelligence (AI) applications toward the end of the year.
CEO Lisa Su said on the company's August earnings conference call with analysts that "we are expecting a large ramp in [the] second half for our data center business and weighted toward the fourth quarter." The company plans to start shipping its MI300 AI accelerators in the fourth quarter, which explains why it is anticipating the data center business will enjoy a big boost.
Su says that AMD is witnessing a "very strong pull on the MI300 accelerators," suggesting that the customer interest in those chips is likely to be very strong. Management also said that multiple customers are looking to deploy the company's MI250 and MI300 AI accelerators at scale, which is why AMD witnessed a sevenfold jump in customer engagements for its AI offerings last quarter.
Throw in the fact that AMD's client processor business has started improving, and investors have yet another reason to be positive about the company's prospects. AMD's client revenue was up 35% quarter-over-quarter in Q2 thanks to a significant jump in sales of its CPUs, which power PCs, as well as the launch of new notebooks by its original equipment manufacturer (OEM) partners.
This suggests that AMD's PC business has hit bottom, and it could continue to improve from here as the market is expected to return to growth in 2024. All this explains why analysts are anticipating the company's revenue to increase 20% in 2024.
How much upside can investors expect over the next year?
AMD is expected to deliver $27.4 billion in revenue in 2024. If the company maintains a constant revenue run rate through the four quarters of 2024, its revenue in the first half of the year would be $13.7 billion. Adding AMD's estimated revenue of $11.7 billion in the second half of 2023 to the estimated revenue in the first half of 2024 would get you $25.4 billion in revenue over the 12 months ending in June 2024.
Multiplying the projected revenue figure by AMD's five-year average price-to-sales ratio of 7.6 would give it a market cap of $193 billion, up nearly 25% from the current level. However, the market could reward it with a higher valuation if its growth picks up thanks to AI.
After all, AMD rival Nvidia commands a much higher sales multiple thanks to the outstanding growth it is delivering. Given that AMD could create a niche for itself in the market for AI chips along with Nvidia, investors would do well to consider buying the stock following its latest pullback, as a solid showing in the second half of the year could send it soaring.
