Advanced Micro Devices, Inc. (NASDAQ:AMD) shares moved higher on Wednesday afternoon as optimism around the company’s artificial intelligence (AI)-related growth outweighed an expected downturn in its embedded business during the fourth quarter.
AMD shares had gained 8.5% at US$106.86 in the early afternoon on Wednesday.
The chipmaker handed down its third quarter earnings after the closing bell on Tuesday which pointed to a greater-than-expected decline in its embedded business as customers work down accumulated inventory.
As analysts at Wedbush noted, the correction in this business, which is focused on making processors for commercial and industrial uses, is expected to continue into next year and weigh on AMD's 2024 numbers.
But they believe the company’s AI growth is “exponentially more important” than embedded sales.
“While the embedded business is attractive for AMD, particularly given its high gross margins, the field-programmable gate array (FPGA) market is a sub $10B billion annual market with historical annual growth rates slightly better than gross domestic product,” they wrote in a note to clients.
“In contrast, NVDA alone is likely to realize about $10 billion in data center graphics processing unit sales this quarter, with most analyst firms projecting an about 40% compound annual growth rate for AI over the intermediate term.”
They wrote that the net of these factors was that the meaningfully better growth expectations for AMD’s AI products trumped questions around where and when its FPGA sales would bottom out and what is normalized revenue for AMD’s embedded business.
They pointed out that AMD guided $400 million in Data Center graphics processing unit-related sales for the first calendar quarter of 2024 and $2 billion in revenue for the full year 2024.
“This optimism contrasts sharply with fears that delays in AMD's MI300 rollout schedule would weigh heavily on 2024 sales,” they noted.
“Rather, CEO Lisa Su indicated production shipments to communications service providers (CSPs) will start in the current quarter and that a ramp into AI use cases (multiple CSPs, OEMs, enterprises, AI startups) should yield most of the first quarter calendar 2024 sales (following shipments to El Capitan this quarter) and the bulk of the revenue comprising AMD's $2 billion-plus 2024 estimate.”
The analysts added that they were also bullish on AMD on their expectation it will gain share in the server computer processing unit space throughout 2024.
They reiterated their ‘Outperform’ rating on the stock but lowered their price target from US$155 to US$130 using updated valuation metrics.
“We see the shift in metrics as appropriate given the contraction in AI semiconductor valuations, which we view as consistent with U.S. restrictions on China that have seemingly reduced the AI market total addressable market,” they wrote.
“We would note our new valuation metrics are also consistent with AMD's historic multiple over the past five years.”
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