AMD: This misunderstood stock is trading at a 20% discount and is a buy

Advanced micro devices AMD had a difficult 2024: the stock ended the year down 18%. While AMD is unlikely to usurp Nvidia NVDA As the leader in AI chips, it’s not too bad to be second best in a lucrative market that’s expected to grow to $500 billion by 2028. We think shares of this slimline semiconductor giant look attractive, trading 20% ​​below our fair value estimate. AMD appears on the Morningstar list The best AI stocks to buy now and is also part of Morningstar’s chief US market strategist Dave Sekera 3 stocks to buy if the economy is faltering – and 3 stocks to buy if it isn’t.

Advanced Micro Devices has extensive expertise in digital semiconductors and is well positioned to benefit from favorable data center and artificial intelligence trends. We consider AMD to be one of two well-known graphics processor companies that are particularly well suited for AI. The company may be playing second fiddle to Nvidia when it comes to AI GPUs, but its expertise is likely to become increasingly valuable – and lucrative – in the coming years. AMD has benefited from its outsourced manufacturing model as its close relationship with industry leader Taiwan Semiconductor TSM allowed the company to maintain a technological edge when rival Intel INTC stumbled with its in-house manufacturing roadmap. We expect AMD’s data center business to boom in the next few years. Its server central processing units are expected to be in high demand, as are its GPUs suitable for AI workloads.

Key Morningstar metrics for AMD

Economic Moat Rating

We believe AMD has a narrow economic lead based on intangible assets around a variety of chip designs. We believe it is more likely than not that the company will generate an excess return on capital over the next 10 years, if not longer. AMD is perhaps best known in its consumer business segment for its CPUs for PC desktops and notebooks. We believe AMD has a head start in this business, not only because of its chip design expertise honed over decades, but also because it is one of two leading companies to hold an x86 instruction set architecture license. We see a similar dynamic with server CPUs in AMD’s data center segment. Although Nvidia is clearly the leader in AI GPUs today, we expect leading cloud providers to continue to look for secondary sources. We think AMD’s embedded business is weak, but generally see no upside in its discrete GPU business for gaming or AMD’s semi-custom chip business for gaming consoles.

Read more about AMD’s Moat Rating.

Fair value estimate for AMD shares

Our fair value estimate of $160 implies a 2025 adjusted price-to-earnings ratio of 28 and a free cash flow yield of 2%. We expect AMD to achieve a compound annual revenue growth rate of 20% from 2024 to 2028. We expect revenue to grow 13% in 2024, accelerating from there to grow at an average of 22% from 2025 to 2028 as AMD’s data center GPU business gains traction in AI applications. Over the next five years, we expect AMD’s data center revenue to grow at a compound annual growth rate of 41%. We model a compound annual growth rate (CAGR) of 16% for customer revenue. As AMD recovers in PCs and grows in data center chips, adjusted gross margin should rebound to 53% in 2024 and reach management’s long-term target of 57% as early as 2028. Data center growth is expected to increase operating margins to 24% in 2024 and 38% in 2028, above management’s long-term target of 35%.

Read more about AMD’s fair value estimate.

Risk and uncertainty

Even though AMD’s GPU designs are on par (or better) than Nvidia’s, we see the associated software tools as a hurdle where AMD is lagging behind today and needs to catch up to the clear leader. Additionally, we expect leading hyperscale cloud computing customers to continue investing in AI processors. If Intel can regain its manufacturing lead, AMD will face a more formidable x86 opponent in PCs, and both could face threats from new entrants. The PC market remains cyclical. AMD’s gaming business often experiences boom or bust cycles, along with PC demand and, more recently, the sharp rises and falls in cryptocurrency mining. AMD also has a customer concentration in the semi-custom business.

Read more about AMD’s risks and uncertainties.

AMD bulls say

• AMD has gained market share in PCs as Intel’s manufacturing prowess has encountered several obstacles in recent years.
• A partnership with leading chipmaker TSMC and the adoption of a chiplet manufacturing strategy have enabled AMD to quickly bring new products to market with more powerful products and greater flexibility.
• AI presents a huge opportunity for GPU manufacturers. While AMD lags behind industry leader Nvidia, we see plenty of room for GPU alternatives like AMD’s in the AI ​​market.

AMD bears say

• Despite AMD’s recent market share gains, Intel remains the industry leader in PCs and could recapture most of the market if it can again provide leading manufacturing capabilities.
• AMD needs to improve its software capabilities to curb Nvidia’s AI dominance, as Nvidia is strong not only in GPUs but also in its associated AI software tools.
• AMD’s gaming semi-custom chip business is committed to the design cycles and launch of new gaming consoles, and it could be a few more years before the next-generation consoles arrive.

This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of January 8, 2025.