Why AMD’s stock dip offers a good buy opportunity

AMD’s Q3 Results and AI Chip Outlook: Advanced Micro Devices (AMD) reported strong third-quarter results, but its stock fell due to investor expectations for faster growth in its AI chip business.

• AMD’s revenue increased 18% year-over-year to $6.82 billion, surpassing estimates of $6.71 billion.
• Adjusted earnings per share rose 31% to 92 cents, matching analysts’ expectations.
• The company’s data center segment saw significant growth, with sales more than doubling year-over-year to $3.55 billion.
• AMD raised its full-year sales projections for AI chips to over $5 billion, a $500 million increase from previous guidance.

Market reaction and investment thesis: Despite positive results, AMD’s stock experienced a post-earnings decline, presenting a potential buying opportunity for long-term investors.

• Shares fell more than 7% in extended trading following the earnings release.
• The main investment thesis for AMD remains intact, centered on the growing sales of its MI300 AI chips.
• AMD is positioned to become the second-largest player in the AI chip market, currently dominated by Nvidia.
• CEO Lisa Su expects the total addressable market for AI chips to grow more than 60% annually to $500 billion by 2028.

Data center and client segment performance: AMD’s data center and client segments showed strong growth, contributing significantly to the company’s overall performance.

• The data center segment now accounts for 52% of AMD’s total revenue, up from 37% in Q4 2023.
• Client segment revenue increased 29% year-over-year to $1.88 billion, driven by strong demand for Zen 5 Ryzen processors.
• AMD gained market share in the CPU server market, with expanded use of EPYC-branded chips by cloud providers.

Challenges and future outlook: While AMD faces some challenges, the company remains optimistic about its future growth prospects.

• The gaming unit underperformed, with revenue declining 69% year-over-year to $462 million.
• The embedded segment, which includes Xilinx, showed signs of gradual recovery with an 8% sequential increase in revenue.
• AMD expects fourth-quarter revenue of $7.5 billion, slightly below analyst estimates of $7.55 billion.
• The company anticipates significant growth in AI chip sales going into 2025, supported by annual releases of next-generation AI products and expanding customer relationships.

Supply constraints and customer relationships: AMD acknowledges supply limitations but sees them as a high-quality problem amid growing demand.

• CEO Lisa Su noted that the supply environment “will continue to be tight” over the next few quarters into 2025.
• The company highlighted relationships with Microsoft and Meta Platforms, who are using AMD’s MI300 accelerators for various AI workloads.
• AMD’s acquisition of ZT Systems’ engineering team is expected to help build out its AI infrastructure.

Analyzing deeper: While AMD’s post-earnings stock decline may concern some investors, the company’s long-term prospects in the AI chip market remain strong.

• The raised guidance for AI chip sales and positive outlook for 2025 suggest that AMD is well-positioned to capitalize on the growing demand for AI accelerators.
• The company’s ability to gain market share in the server CPU market and strong performance in the client segment demonstrate its competitiveness across multiple product lines.
• As supply constraints ease and new customer relationships develop, AMD may be poised for significant growth in the coming years, making the current stock dip a potential opportunity for long-term investors.