Summary

• Advanced Micro Devices, Inc. stock has dropped significantly, but we see a mean reversion opportunity with a strong value and growth combination.

• Despite concerns, AMD's data center and client segments show robust growth, while gaming and embedded segments face cyclical challenges.

• Margins have improved, and the company maintains solid financial health with increasing net income and free cash flow.

• AMD's valuation reset presents a buying opportunity, with projected 2025 EPS growth of over 40% and strong support at $100.

Advanced Micro Devices, Inc. (NASDAQ:AMD) stock has given up a ton of its value since peaking in March 2024 at $227. We have traded this stock numerous times. Publicly, we most recently suggested a buy in the $140s back in August, with a trading target in the $170s, which was executed successfully. Here we are just months later, looking at a $102 print. We started to buy aggressively. The valuation has completely reset after this carnage, and we think a mean reversion is in store. Sure, the space is reeling from fears of peak AI, and concerns about NVIDIA Corporation's (NVDA) mere 71% gross margin guide (note the sarcasm), but after losing 60% of its value from the peak, the value, and growth combination is at an extreme.

Take a look at the value and growth metrics, courtesy of Seeking Alpha. The future is bright.

AMD stock a buy value AMD earnings

Seeking Alpha AMD Valuation Grade

The forward PEG, and, of course, the p/e on a forward basis stand out. Also, we should point out the 5-year averages, we are 30-70% below the average valuation here. Well, isn't that peculiar? Why? The growth is still there, and it is strong, even if it has moderated.

Why is AMD stock down?

Seeking Alpha AMD growth

Now look, perhaps it was a bit ahead of itself, but the stock is being treated as if growth is completely drying up. Sure, there are segments that are not doing well, but remember there is a cyclical nature to some of the business. What we see here is even with estimates having been reduced some, the projected growth sets up a unique combination of value and growth, something we look for in our models at BAD BEAT Investing. Take a look at the estimates for this year and next.

AMD earnings estimates BAD BEAT Investing is legitimate

Seeking Alpha AMD analyst consensus annual earnings estimates

Surely, this is subject to change. But it would need to be a drastic outlook cut to really justify further downside. Our opinion? Shares are oversold and are on many metrics. A mean reversion purchase can result in gains. Many of our members own this stock, and we have been buying as shares came down, recently adding around $110. Overdone in our opinion.

Looking at the technicals, the RSI, for one, is about in oversold territory. While the chart looks painful, if you back out to a three-year view, we see significant levels of support. Make no mistake, there are concerns over trade, and business with China. Many contributors have discussed this. There was also the news that AMD might offload some data center plants for some $4 billion, which may have caused demand anxiety, particularly as the Q4 report showed data center slowed to 'just' 69%.

We think reports as a whole from chip names thus far quell such demand fears. And of course, as we know, the chip names as a basket have been poor performers for months. This is a valuation and growth combination call, with the chart. Let us touch on the most recent performance and outlook, which justify a buy at these levels.

Performance was strong in Q4, though sales declined as expected

The AMD Q4 earnings were overall strong. The headline results were above consensus for revenue, though in line with the bottom line. However, the stock was not priced for a sizable beat and an amazing outlook going into earnings. That said, the lack of a beat and just a positive outlook for 2025 drove the next leg lower, which we now see. We think that operations continue to benefit from the AI revolution, which is only a boon to operations. Yes, competition is stiff. We are watching every chip report for signs that AI is indeed a deflating bubble, but we are not seeing that. That said, in Q2, revenue was $7.7 billion and was up 24.2% from last year, and surpassed estimates by $170 million. Again, we recognize that not all segments are firing. Leadership is still in the data center and client segments which both saw record revenue, while gaming continues to suffer, mostly due to where we are in the gaming and PC demand cycle. Embedded segment revenue took a hit too as customers normalized their inventory.

Record Data Center segment revenue was a highlight but was interpreted as slowing. Yet, we remind you, comps are getting tougher due to the law of large numbers. So it was “just” 69% growth, hitting $3.9 billion. This was primarily driven by an ongoing ramp of GPU shipments, and strong growth in AND EPYC CPU sales. For all of 2024 the growth was 94% in Data Center. We also like the bounce back in the Client segment revenue. This revenue was $2.3 billion, up 58% year-over-year, primarily driven by sales of its Ryzen processors. Yes, the Gaming segment is on a down part of the cycle, we do not deny it. Revenue was $562 million, down 59% year-over-year. Further, the Embedded segment revenue was $932 million. This was down 13% year-over-year.

Margins were up

You know, we saw some anxiety with NVDA margins, which are well over 70%. Compared to this, AMD has a margin problem. Except they do not because margins improved from last year and are holding firm sequentially as adjusted. AMD's GAAP gross margins were 51%, up 400 basis points year-over-year, and also rising from 50% in the sequential Q3. Adjusted gross margins also expanded, widening to 54%, and were firm from the sequential quarter. This is not bad news here folks. While Q2 2022 was 54% for margins, we are encouraged by the present widening of margins.

Operating expenses remain a bit higher than we would like to see, a slight negative. We note that the 23% increase in adjusted operating expenses was about on pace with revenue gains, but was not enough to offset the strong gross margins. While it stands to reason operating expense will increase as revenues ramp, any control efforts here will feed the bottom line. In Q4, AMD's operating income, as adjusted, rose 43% to $2.13 billion. That said, putting it all together, AMD's net income rose from $1.25 billion from a year ago to $1.78 billion. Earnings per share increased to $1.09 from $0.77 last year. The company also has a solid balance sheet, with widening free cash flow. Total debt stood at $1.72 billion, with cash and equivalents of $3.79 billion.

Outlook

AMD stock has corrected heavily on trade war concerns, uncertainty for AI, data center fears, and a broader rotation out of chip stocks. But we have seen a complete valuation reset to pretty much a market multiple now, despite rampant growth. Yes, the growth rate has come down some, but it is still incredibly strong. Sure, we still see ongoing weakness for PCs and client revenue, given where we are in the cycle. We continue to think that the data center leads the way, and fears about demand are overblown. For Q1, revenue is seen at $6.8 billion to $7.4 billion, a 30% growth from last year. Gross margin will hold firm at around 54%.

We showed you the above consensus estimates. We will be slightly more conservative here. Our view for the year on revenues is $31-32 billion. This is still 22% growth at the midpoint. Assuming at least a 52% margin for the year (below consensus), and even roughly comparable capex and opex increases we have seen, we see EPS of $4.40-$5.00 for 2025 as likely. Assuming the midpoint that is over 40% growth. Not too bad for a stock trading at 22X.

Take-home

Advanced Micro Devices, Inc. stock is deep in bear territory. But on the longer-term chart, there is support at $100. The valuation and growth combination could not be clearer. It will take a significant underperformance and ramping down of expectations to keep the stock pinned down for an extended time. This, of course, comes with the risks aforementioned, but we view them as more than priced in here.