The rise of artificial intelligence has proven transformative for semiconductor chipmaker Advanced Micro Devices (NASDAQ: AMD). Its burgeoning AI sales sent AMD shares skyward over the last year, from a 52-week low of $93.12 in 2023 to a high of $227.30 in March.
Since then, its stock has pulled back from this high, trending down in recent weeks. Shares declined further lately amid the broader stock market's drop.
With AMD's share price well off its 52-week high, does this suggest the stock is a buy? To help assess whether AMD is a worthwhile long-term investment, let's dig into the semiconductor giant's recent performance.
AMD's AI success
Before AI exploded onto the scene in 2023, AMD made around 30% of its income from selling semiconductor chips to the video game industry. Now, AI is dominating its sales mix, and that's led to amazing revenue growth.
For example, the company delivered outstanding second-quarter results thanks to strong sales of its semiconductor chips for AI. AMD's Q2 revenue increased 9% year over year to $5.8 billion.
In particular, its AI products targeted for the cloud computing industry experienced explosive growth. This segment, which falls under AMD's data center division, saw Q2 sales expand an impressive 115% year over year to $2.8 billion.
Q2 was the latest quarter in a streak of accelerating year-over-year sales growth for AMD's data center business.
Quarter | Data Center Revenue | YOY Change |
|---|---|---|
Q2 2024 | $2.8 billion | 115% |
Q1 2024 | $2.3 billion | 80% |
Q4 2023 | $2.3 billion | 38% |
Q3 2023 | $1.6 billion | Flat |
Data source: AMD. YOY = year-over-year.
The data center division's incredible expansion over the past year means this business accounted for nearly half of the company's $5.8 billion in Q2 revenue. It's now the dominant part of AMD's business.
How AMD expanded its AI business
Part of the company's rapid data center growth is driven by big cloud computing providers increasingly opting for AMD's products. CEO Lisa Su stated, "The number of AMD-powered cloud instances available from the largest providers has increased 34% from a year ago to more than 900." These customers include Netflix and Uber.
AMD's data center segment wasn't the only beneficiary of insatiable customer demand for AI products. Its client division, which sells AI chips for the PC market, saw Q2 year-over-year sales increase 49% to $1.5 billion.
So it's no surprise AMD is doubling down on its AI business. In July, the company acquired Silo AI, which will help customers integrate AMD hardware into their AI systems.
Moreover, AMD is poised to maintain its momentum of rising year-over-year sales in Q3. The company's outlook calls for third-quarter revenue to reach around $6.7 billion, a significant step up from the previous year's $5.8 billion.
Other considerations with AMD stock
Despite its AI success, other parts of AMD's business were not so fortunate. The company's once-potent gaming division's sales declined in Q2, falling a whopping 59% from 2023 to $648 million.
In addition, its embedded business, which provides semiconductor products for industries such as the automotive sector, saw revenue drop 41% in Q2 to $861 million. The decline in its gaming and embedded businesses is part of the cyclical nature of the semiconductor industry.
This means it's normal for AMD to go through periods of ups and downs in parts of its business, depending on the macroeconomic factors at play in the industry it's servicing. In fact, AMD management expressed its belief that the embedded division will gradually recover in the later half of this year.
To AMD's credit, its ability to quickly build up sales of its AI offerings means the cyclical downturn in some parts of its business can be offset by the growth in its AI-focused areas.
The company's robust AI business is benefiting its financials. AMD's gross margin expanded to 49% in Q2, up from 46% in the prior year. Management estimates gross margin will increase again in the third quarter to 54% thanks to the anticipated growth in its data center business.
Its Q2 net income was up 881%, hitting $265 million versus the prior year's $27 million. This led to Q2 diluted earnings per share of $0.16, up 700% from $0.02 in the previous year.
AMD's stellar second-quarter results combined with its trend of rapidly rising AI revenue, which is expected to continue into the second half of 2024, demonstrates why it's a good company in which to invest.
Wall Street agrees. The current consensus among Wall Street analysts is a buy rating with a median share price target of $195 for AMD shares.
Its rising revenue, strong financials, and strategic investments in AI mean the company is firing on all cylinders right now. With its embedded business poised to bounce back later this year, AMD is well positioned to see revenue expand even more in coming quarters, making its stock worth buying and holding for the long term.
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Robert Izquierdo has positions in Advanced Micro Devices and Uber Technologies. The Motley Fool has positions in and recommends Advanced Micro Devices, Netflix, and Uber Technologies. The Motley Fool has a disclosure policy.
Is AMD Stock a Buy? was originally published by The Motley Fool