Summary

• Advanced Micro Devices, Inc. closed FY24 with 14% top-line growth, driven by strong performance in the Data Center and Client segments, despite declines in Gaming and Embedded.

• AMD is well-positioned for durable growth in CPU & GPU sales, with strong support from the hyperscalers capital outlay for CY25.

• AMD's financial outlook remains robust, with anticipated growth in Data Center and Client segments as more AI applications move to production environments.

BlackJack3D

Advanced Micro Devices, Inc. (NASDAQ:AMD) closed FY24 with 14% top-line growth, driven by an acceleration in sales in the Data Center & Client segments. With an optimistic spending outlay across the hyperscalers for compute capacity, AMD is well-positioned for durable growth in CPU & GPU sales as it rolls out the next generation of GPUs in the coming quarters. In addition to this, enterprises are expecting to begin bringing AI applications into production, potentially leading to durable growth in AMD’s Client segment as more workloads are processed at the edge.

With shares declining -37% from their recent high in October 2024, I believe investors will realize a strong buying opportunity for AMD shares, potentially bottoming out at around $92-96/share. With the strong growth outlook, I am reiterating my BUY rating for AMD shares with a price target of $179/share at 7x eFY26 price/sales.

Advanced Micro Devices Operations

Corporate Reports

AMD closed out FY24 with strong accelerated performance in its Data Center and Client markets, growing by 94% and 52%, respectively, on a year-over-year basis. Revenue was offset by softness in Gaming and Embedded as console inventories are ramped down and the industrial and communications markets remain soft. Management is anticipating the demand environment for eFY25 to remain strong in AMD’s Data Center and Client businesses and is anticipating a return to growth for Gaming and Embedded.

Data Center

The Data Center segment grew by 69% when compared to the previous year in Q4 ’24 driven by strong EPYC and Instinct adoption. Despite this high level of growth, the rate has significantly fallen when compared to Q3 ’24 segment growth of 122% on a year-over-year basis. AMD began ramping up production of its gen-5 EPYC processors in FY24. This chip is designed to support larger AI workloads while reducing the server rack footprint in the data center.

Accordingly, AMD has strong demand for EPYC CPUs by the hyperscalers, driving larger deployments for both internal compute infrastructure and cloud services. In addition to this, AMD is realizing scaled demand by the enterprises with the number of EPYC cloud instances more than doubling on a sequential basis in q4’24. Enterprises are also adopting EPYC CPUs on-prem, likely the result of more workloads being processed at the edge.

In the data center, AMD expanded its ROCm software suite with improvements in inferencing and training performance. AMD is realizing strong sales performance for its Instinct GPUs. Though Nvidia (NVDA) has a stronghold on market share for GPUs, Nvidia’s chips are typically associated with model training and AMD’s Instinct with inferencing. This may create a late-stage catalyst for AMD in the coming quarters as more AI models move from pre-training, training, and on to production.

As part of its enterprise go-to-market, AMD has partnered with Dell Technologies (DELL) to offer modular rack scale solutions for faster deployments. This strategy may work exceptionally well for AMD in the coming quarters as AI becomes more heavily utilized in enterprise operations. Given the complexity of AI server racks, the all-in-one solution can improve the time-to-market for enterprises that may be seeking to leverage AI applications. Along with AMD’s ROCm software stack, over 1mm models on Hugging Face can run on an unconfigured AMD system.

Meta Platforms (META) has deployed MI300X GPUs to support its Llama 405B frontier model. Though the runway with Meta may remain strong in the coming quarters, Mark Zuckerberg, CEO of Meta, has suggested that the firm may gradually transition to its custom ASICs, MTIA, over time to process AI workloads. Though the timeframe for such a transition isn’t known, knowing that there may be a transition from MI300X to MTIA in late-2025-2026 may create some headwinds for AMD.

Amazon (AMZN) and Microsoft (MSFT) have each indicated a significant step-up in capital investments for CY25, primarily geared towards compute capacity.

AMD began volume production of the next generation of its Instinct GPUs, MI325X, in Q4 ’24. Beyond this, AMD is planning to release the next generation MI350 series GPUs that feature CDNA 4 architecture. CDNA 4 is said to improve AI compute performance by 35x when compared to the previous generation, providing a large step-up in performance for customers. AMD will begin sampling customers in eq1’25 and expects shipments to begin in mid-2025. MI400 GPUs remain on track for launch in 2026.

Management noted in the Q4 ’24 earnings call that Data Center figures in e1h25 will be reflective of 2h24. Though management wasn’t specific with the figures to expect, I believe that this may mean that Data Center growth will slow significantly when considering the year-over-year growth rate. For modeling purposes, I suspect that this will translate to 53% & 38% year-over-year growth for eq1’25 & eq2’25. The slowdown in growth may be in part associated with AMD rolling out the MI350 GPUs.

Client

Client revenue grew by 58% on a year-over-year basis in q4’24 driven by strong demand for Ryzen desktop and mobile processors. Management is expecting the PC TAM to grow in the mid-single-digits on a year-over-year basis in 2025, potentially driven by the Windows 10 end-of-life and ramp-up of Windows 11. AMD realized a strong sell-through for Ryzen AI 300 Series notebooks in Q4 ’24. This may potentially lead to certain headwinds in the coming quarters as AI PC inventories are digested, as seen by Intel Corp. (INTC) and Microsoft (MSFT). Nonetheless, AMD is partnering with Dell to release a full portfolio of commercial PCs powered by Ryzen Pro processors that is expected to launch in Q2 ’25.

Gaming & Embedded

Gaming faced a significant decline in Q4 ’24 as Microsoft and Sony (SONY) moved to reduce channel inventory. AMD has been focusing its attention on cycling into the next generation Radeon 9000 series GPUs with RDNA 4 architecture, with the Radeon 9070 GPUs going on sale at the end of Q1 ’25.

Embedded also faced a decline in Q4 ’24 as the market is slower to recover and the demand environment remains mixed. AMD realized strength in aerospace & defense, offset by softness in the industrial and communications sectors. Despite the near-term headwinds, AMD closed $14b in design wins in 2024 with a large win for embedded processor designs.

Update on ZTE Systems

The ZTE acquisition remains on track and is expected to close in e1h25. Management noted that the sale of the manufacturing business should follow shortly after the close of the acquisition, allowing for a seamless acquisition and cash raise.

Advanced Micro Devices Financial Position

Corporate Reports

Looking to Q1 ’25, management is guiding a -7% sequential decline in revenue, driven by declines in Client & Embedded. Management anticipates Data Center will decline at the same rate as the corporate rate, at roughly -7%. Though this may suggest that the growth rate is slowing down, management noted that CPU sales are expected to ramp up as the server refresh takes shape.

For Q1 ’25, I’m forecasting AMD to generate $7b in net revenue, with an adjusted EPS of $0.97/share. Within the figures, I’m expecting some margin expansion in the Data Center segment as more mix shifts to CPU sales. I’m also anticipating AMD to realize improved margins in Client as revenue scales with the ramp-up in PC sales for the Windows 11 transition. I’m expecting some headwinds in Embedded and Gaming as both segments undergo the remainder of the downcycle. Embedded may face certain headwinds from lackluster activity in the automotive and industrial markets.

AMD experienced an inventory build in Q4 ’24 to 160 days inventory outstanding, likely the result of ramping up production of the MI325X. I suspect AMD will be working down this inventory over the course of the next few quarters in tandem with an inventory build of MI350X. This should provide some tailwinds to free cash flow generation in the coming quarters.

Risks Related To Advanced Micro Devices

Bull Case

AMD is nearing a paradigm shift in AI from training to enterprise production, meaning that enterprises will run production data in AI models. This can potentially lead to AMD realizing stronger sales in both Client & Data Center as more workloads are run at the edge, CSPs, and in private data centers. AMD may also realize margin improvements as sales scale, leading to stronger operating leverage.

In terms of catalysts, analysts will be looking at AMD to make progress towards reaching $10b in AI server sales.

Bear case

Though AMD’s Instinct GPUs are optimized for inferencing, not having a rack scale solution outside its ODM partnerships can potentially create some headwinds when selling to enterprises. The recent release of DeepSeek brought forth questions about the need for such high levels of compute capacity, potentially leading enterprises to build out with lower cost infrastructure like with Intel (INTC) Gaudi.

Client may be in an inventory digestion period, as suggested by Microsoft in its recent q2’25 earnings report. This can lead to softer sales volumes in the coming quarters.

Valuation & Shareholder Value

Corporate Reports

AMD shares are currently trading at a significant discount to its major semiconductor peers. I suspect this is reflective of investor sentiment towards the slowing AI server growth for AMD as it trails its major peer Nvidia (NVDA). Despite this factor, AMD’s market opportunity remains at arm’s length as enterprises transition to production for AI applications.

Seeking Alpha

AMD repurchased 5.9mm shares in FY24 and has $4.7b remaining under its share repurchase authorization.

Trading View

Valuing the firm, I believe this sell-off in AMD shares opens a strong buying opportunity for investors. Despite being bullish on the name, I suspect AMD shares may fall closer to my gray-sky scenario in the near-term before realizing a return to growth. Given the current trajectory, I believe shares may fall to $92-96/share before a rebound occurs.

Using an internal valuation model based on my net sales forecast and AMD shares’ historical trading premiums, I believe shares should trade at $179/share at 7x eFY26 price/sales. I am reiterating my BUY rating.

Corporate Reports

Using the model: the valuation table above references my financial forecast in the firm’s “financial position” section and ties it to the stock’s historical trading premiums. The trading premium array is derived through the normal operating cycle, with the blue-sky scenario being the stock’s peak multiple and the gray-sky scenario being the lowest point. The target multiple aims for the midpoint, or the most likely trading range for the company’s stock. The trading multiples from there are set to a probability factor based on the likelihood of the stock trading at that premium base on its historical presence. From there, the trading multiple is tied to the probability factor to derive its relative market cap and relative multiple.