Undervalued AMD Stock: Why Wall Street’s 42% Annual Growth Prediction Might Be Too Low

Stocks to buy

Despite beating earnings per share estimates for three consecutive quarters Advanced Micro Devices (NASDAQ:AMD) stock fell nearly 9% to $144.27 leading to a 14% decline in three months, contrasting Nvidia’s 22% rise. The reasons for this slump include ASML Holding’s missed orders forecast and Nvidia’s perceived role as an inflation hedge.

AMD expects to sell more than $4 billion of AI chips in 2024. This looks higher than its previous estimate of $3.5 billion. Moreover, the stock has surged 10% so far this year, and it revealed plans to develop more AI chips and processors. Let’s dive into why AMD stock still looks like a buy in the semiconductor space.

R&D Center in Taiwan

AMD has sought MOEA approval to establish an R&D center in Taiwan under the A+ program. Details remain undisclosed as the application process progresses.

The Executive Yuan aims to boost Taiwan’s global R&D status, enticing tech firms with subsidies of up to 50% investment. While AMD’s plan details remain undisclosed, reports suggest a $155 million investment, with conditions involving collaboration with local IC designers. Servers employing AMD’s AI chips will be manufactured in Taiwan.

MOEA urged AMD to recruit 20% foreign talent for R&D in Taiwan, aiming to avoid local talent competition. Collaboration with local universities is also encouraged.

AMD’s CEO, Lisa Su, is expected to discuss the plan at Computex Taipei, following positive responses to MOEA’s conditions. Past A+ program approvals included ASML Holding N.V., Lam Research Corp., and Applied Materials Inc.

Microsoft and AMD Stock

Microsoft recently announced plans to introduce AMD AI chips for cloud computing, rivaling Nvidia. Details were unveiled at the company’s highly-anticipated Build conference. Microsoft previewed Cobalt 100 custom processors. These AMD MI300X clusters on Azure offer an alternative to Nvidia’s H100 GPUs, often in high demand.

Companies typically cluster multiple GPUs for AI tasks. AMD’s powerful AI chips aim to handle large models, competing with Nvidia, and notably, Microsoft also offers Maia AI chips. Cobalt 100 processors, providing 40% better performance, are being tested for Teams, competing with Amazon’s Graviton CPUs.

AMD Is AI-Strong

On May 16, Wolfe Research shifted focus from Nvidia to AMD for AI gains. Praising Nvidia’s CEO, Jensen Huang, for early AI investments, Wolfe now favors AMD, citing Lisa Su’s leadership. Both stocks are recommended for long-term investment.

In December, AMD introduced its MI300 AI GPUs, driving an 80% year-over-year surge in Q1 2024 data center revenue to $2.3 billion. With rapid adoption, sales reached $1 billion in under four months.

Predictions suggest a $2 billion annual run rate by year-end. MI300X GPUs outperform Nvidia’s H100, enhancing token performance. AMD revised its 2024 data center revenue guidance to $4.0 billion due to the success of the MI300 AI GPU.

Believe in AMD Stock

Nvidia dominates the AI chip market with high-margin data center GPUs, while AMD’s single-digit profitability offers significant potential growth. However, sales of data center GPUs are expected to drive earnings growth, with AMD forecasting a slight gross profit margin increase in the near term. 

AMD’s projected 2026 earnings stand at $7.26. A forward price-earnings ratio of only 40-times suggests a $290 stock price could be possible, nearly double the current $150 level.

With Su’s track record, AMD’s potential to surpass expectations shouldn’t be overlooked. Despite trailing Intel a decade ago, AMD gained significant market share. Su views the AI transition as an essential growth opportunity, positioning the company for success.

Wall Street predicts AMD’s earnings will grow annually by 42% in the long term. I can’t disagree there — I think that’s a totally reasonable target.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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