Artificial intelligence (AI) has supercharged semiconductor stocks in 2023, which is not surprising as the proliferation of this technology opened up a whole new revenue opportunity for companies that produce them.
After all, the AI chip market is anticipated to generate an eye-popping $304 billion in annual revenue in 2030, according to Next Move Strategy Consulting. That's going to be a big jump over last year's revenue of just less than $29 billion.
Advanced Micro Devices (AMD 1.72%) has started scratching the surface of the AI chip opportunity. The company said on its latest earnings conference call that it expects AI chips to contribute $400 million in revenue in the current quarter. In 2024, AMD is currently anticipating $2 billion in AI-fueled revenue.
However, AMD made its name as a supplier of chips for personal computers (PCs). AMD's central processing units (CPUs) and graphics cards have been popular among gamers and creators thanks to their ability to run resource-intensive tasks such as games and editing software efficiently. This puts the company in a nice position to make the most of the next big development in the PC market -- AI.
Sales of PCs capable of running AI applications are anticipated to grow rapidly
The PC market has been depressed as shipments declined big time thanks to weak demand. However, it recently started stabilizing, and market research firm IDC anticipates the PC market to return to growth from 2024. The researcher estimates that PC shipments could increase 3.7% in 2024 to 261.4 million units. What's more, PC shipments are forecasted to clock a compound annual growth rate of 3.1% through 2027.
While these growth projections may not seem attractive at first, there is one catalyst in the form of AI that could drive a big upgrade cycle in PCs. According to market research firm Canalys, sales of AI-enabled PCs are expected to take off next year. The firm estimates that 19% of PCs in 2024 will be AI-capable. That figure is expected to jump to 60% by 2027.
It is worth noting that nearly all AI services are cloud-driven because of the huge computational power that's required to run them. However, AI applications that can run locally on PCs are also gaining traction. In August of last year, Stability AI launched a service that allows users to generate AI art right on their PCs. Stability AI recommended that users' PCs should have at least 6.9 GB of RAM (random access memory) for the application to work.
However, Stability AI's application reportedly requires a lot of computing power and takes a toll on a computer's system memory, graphics card, and RAM. Also, creating AI art through Stability AI's offering is a time-consuming process, as generating a single low-resolution image can take 10 minutes if you don't have a powerful enough PC.
Given that there are many other AI apps apart from Stability AI that users can install on their PCs, it wouldn't be surprising to see consumers spending money on more powerful chips such as CPUs and graphics cards so that they can run them more efficiently on their computers. This could open up a solid opportunity for AMD to increase sales, and the company is already making moves to capitalize on this opportunity.
AMD has started taking advantage of AI-powered PCs
AMD CEO Lisa Su said on the company's latest earnings conference call:
In PCs, there are now more than 50 notebook designs powered by Ryzen AI in the market, and we are working closely with Microsoft on the next generation of Windows that will take advantage of our on-chip AI Engine to enable the biggest advances in the Windows user experience in more than 20 years.
Su added that sales of AMD's Ryzen 7000 CPUs, which come equipped with an AI accelerator, have increased significantly. The company was among the first to integrate AI accelerators on its PC CPUs, which explains why AMD has been able to deploy a good number of laptops with some level of AI functionality into the market.
More importantly, it looks like this strategy has led to a sharp turnaround in AMD's client processor business, which was earlier struggling on account of weak PC demand.
The company's revenue from selling PC processors increased an impressive 42% year over year to $1.5 billion in the third quarter of 2023. For comparison, PC shipments were down 7.6% year over year during the quarter, according to IDC, which means AMD outperformed the end-market by a wide margin.
The PC market is set to start growing once again from next year, and AI could encourage users to upgrade their CPUs so that they can run compatible apps easily, suggesting that AMD's client processor business may be able to sustain its impressive momentum. That bodes well for the company's overall performance, as this segment produced 26% of its total revenue last quarter.
Moreover, the improvement in the PC market and AMD's growing prominence in AI chips are expected to drive a big turnaround in its fortunes in 2024.
AMD EPS Estimates for Current Fiscal Year data by YCharts
Analysts are anticipating AMD's earnings to drop from $3.50 per share in 2022 to $2.60 per share this year. The chart above points toward a significant acceleration in the company's bottom-line performance.
Investors have started buying this semiconductor stock hand over fist, which is evident from the 16% jump in its share price since it released its Q3 report on Oct. 31. This seems like the smart thing to do, as AMD's bright prospects could lead to a stronger financial performance and healthy stock upside.
