AMD (NASDAQ:AMD) the title is in rally mode again. This has less to do with the third-quarter 2023 earnings update and more to do with AMD management colluding with other tech executives touting the upcoming MI300X chip system for AI. AMD stock has now more than doubled its value in 2023 amid an AI-fueled rally, and it’s returning to all-time highs following the MI300X event in early December.
But like all the semiconductor stocks that are laying the groundwork for the AI movement, AMD trades at a steep premium. Is this still a buy for 2024?
Move over, Nvidia – AMD wants a seat at the AI table
The current hype around generative AI infrastructure has really gained momentum. ignited by Nvidia and its explosive data center revenues earlier this year. At this stage, the market AI training – where a company’s data is used to customize an algorithm capable of creating new digital content on command – is dominated by Nvidia. At the December 6 AI event, AMD CEO Lisa Su claimed that the MI300X has achieved performance parity with comparable Nvidia systems in AI training.
However, the market for inference – when the trained AI algorithm is used – is more open. This is where AMD touts the performance of the MI300X. Su claims the chip system is capable of performing 1.4 times to 1.6 times better than the competition.
But why all the hype in the first place? The value of the world’s existing data centers has been estimated at around $1 trillion, and the IT infrastructure within them needs to be refreshed or replaced every four to five years. Generative AI infrastructure is now integrated into the existing data center base, and it has been postulated that this new AI construct could approximately double the value of the data center market by the end of this decade .
To wit, Su said AMD believes annual spending on AI infrastructure will grow from “something like $30 billion in 2023 to over $150 billion in 2027.” But after everything that happened last year, Su says AMD now believes the market for data center AI (AI acceleration systems like the MI300X) will reach “over 400 billion in 2027.”
If this is even a vaguely accurate estimate, AMD could stand to gain a lot. And it explains why the tech industry as a whole flocks to AMD’s (as well as Nvidia’s) AI events. Su and company were joined on stage by executives from Microsoft, Metaplatforms, DellAnd Super microcomputer to sing the praises of the MI300X.
A bonus is justified, but how much?
All the hype aside, AMD’s AI chip business is still far behind Nvidia’s. No financial updates were provided at the December AI event, but about a month before, Su said in AMD’s Q3 2023 earnings update that accelerator sales of AI could “exceed $2 billion” in 2024, compared to around $400 million in 2023.
Those are stellar growth prospects, but AMD is a broadly diversified company that’s on track to generate nearly $23 billion in total revenue this year. The MI300X alone isn’t a reason to buy AMD shares, which currently trade at a premium 35 times higher than Wall Street analysts’ expectations for 2024 earnings per share.
I’m a happy AMD shareholder, but I take a more cautious approach to the AI hype. That said, I think there is more reasons to be optimistic about AMD’s 2024 prospects. It appears the PC market is stabilizing and robust profitability may return. This appears to be a forgotten part of AMD’s history that could offer potential upside for the stock.
Still, until more clarity is provided on what will happen in 2024 regarding financials, I think it’s best to buy AMD stock in small lots at present, perhaps be using a dollar-cost averaging plan.
Should you invest $1,000 in advanced micro devices right now?
Before buying Advanced Micro Devices stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Advanced Micro Devices was not one of them. The 10 selected stocks could produce monster returns in the years to come.
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor The service has more than tripled the performance of the S&P 500 since 2002*.
*Stock Advisor returns December 11, 2023
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Nicolas Rossolillo and its clients hold positions in Advanced Micro Devices, Meta Platforms and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.
AMD Updates Its New AI Chip: Is the Stock a Buy for 2024? was originally published by The Motley Fool
